Solo 401k home purchase question

BACKGROUND: I successfully opened the bank account for the solo 401k. I have one more question–for example: I transfer to my Solo 401k checking account $100k. I make a Solo 401k Loan of $20k and I will pay back to the Solo 401k every month.

QUESTION: After the loan, my solo 401k checking account has 80k left. I then invest the solo 401k in a home for $50k, repairs cost 5k and later rent out. Do I have to pay Tax on 55k for my investment home?

ANSWER: First, because the real estate property (the home) would be owned by the solo 401k (that is, title to the property would be taken in the name of the solo 401k-click here for full procedure), the following rules would apply when a solo 401k is invested in real estate:

  • You as the solo 401k owner (trustee) cannot personally use the property (home) because it is owned by the solo 401k;
  • Income generated from the property (the home) must flow back to the solo 401k bank account;
  • Expenses (e.g., repairs, insurance, property taxes, etc.) associated with the solo 401k owned property (the home) must be paid with solo 401k funds;and
  • Because the property (the home) will be owned the solo 401k, income generated from the property will not be taxable since it will flow back into the solo 401k account. However, once you start making solo 401k distributions (usually at retirement), taxes would apply.

Thank you. Ralph in CA

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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