QUESTION: We’re planning to purchase a property with my self-directed Solo 401kfunds, using seller financing for 70% of the purchase. What paperwork do we need to complete to allow us to do it?
ANSWER: When a retirement account such as a Solo 401k plan uses seller financing when investing in real estate, it’s commonly known as debt financing or non-recourse loan.
Under a non-recourse loan arrangement, the loan is to the Solo 401k not the trustee/participant. This is very important to understand because if the loan is to the Solo 401k trustee/participant it will be deemed a Solo 401k prohibited transaction, resulting in taxes and possible penalties. Furthermore, the non-recourse loan must be documented in writing through a note payable containing the “non-recourse loan language”, the non-recourse loan is, of course, paid back by the Solo 401k. What’s more, since the non-recourse loan is to the Solo 401k, the Solo 401k must be listed as the borrower, not the trustee/participant.
To learn more about non-recourse loan visit following pages and blogs from our website and sister website.