The Solo 401k plan may not sell or exchange property, or lease property, to a disqualified person, nor may a disqualified person sell or exchange property, or lease property to the Solo 401k plan. See ERISA 406(a)(1)(A).
This includes direct or indirect transactions. For example, a sale of property by the Solo 401k plan to a third party, where the sale is for the purpose of the third party selling the property to a disqualified person, would be an indirect sale between the Solo 401k plan and the disqualified person.
Examples of prohibited Solo 401k loans or leases
EXAMPLE 1 – sale between Solo 401k plan and service provider. Mary is an accountant. She prepares Form 5500s for ABC Company’s Solo 401k plan. The ABC Solo 401k plan owns a house which the trustee of the Solo 401k is trying to sell. Mary agrees to purchase the property. An appraisal of the property states that the value of the property is $250,000. The Solo 401k plan trustee agrees to sell the property to Mary for $250,000. The sale is a prohibited transaction because, as a service provider to the plan, Mary is a disqualified person.
EXAMPLE 2 – lease between Solo 401k plan and daughter of Solo 401k plan trustee. A Solo 401k owns an apartment building. One of the tenants is Rachel, the daughter of the plan’s trustee. As a party-in-interest, Rachel’s leasing of the apartment is a prohibited transaction, because the apartment is Solo 401k asset. This is true even if the lease is for a fair market rental value.
EXAMPLE 3 – sale between Solo 401k Plan and its Trustee. Larry holds a parcel of land in his Solo 401k plan. Larry has decided to retire and wants to build a retirement home on the property. After having the property appraised, Larry purchases the property from his Solo 401k. Larry’s purchase of property from his Solo 401k plan is prohibited transaction because the property is a Solo 401k asset.
However, had Larry instead taken receipt of the property through a distribution from his Solo 401k plan, which would be reported to the IRS on form 1099-R, and paid the applicable income taxes (assuming that the property had been purchased with non Roth Solo 401k funds), he could then personally own the property. Note that earnings from Solo 401k Roth are not subject to income taxes.
Indirect sales and leases. Prohibited transactions also can occur as an indirect transaction between the Solo 401k and a disqualified person. This might occur when an intermediary is used to arrange a transaction that has the effect of a sale or lease between the Solo 401k and a disqualified person. For an example, see DOL Advisory Opinion 2006-01A, where a lease between an LLC and a corporation, where only the corporation was a disqualified person with respect to an IRA, was treated by the DOL as a prohibited transaction because it resulted in an indirect lease between the IRA and the S corporation.
In other words, if a Solo 401k transaction directly violates the prohibited transaction rules, simply altering the transaction to remove the disqualified person from direct involvement is insufficient. So merely insulating that person from the transaction and enlisting a third party does not make a prohibited transaction permissible. Under the Solo 401k prohibited transaction rules, a disqualified person may not indirectly do what cannot be done directly.
EXAMPLE: Mike used his Solo 401k plan to invest in a rental property. Mike would now like to purchase the rental house from his Solo 401k. Mike’s direct purchase from the Solo 401k plan is clearly a prohibited transaction because Mike is a disqualified person, and the Solo 401k plancannot have a sale between itself and such a party. So, as trustee of his Solo 401k plan Mike sells the property to John, a person unrelated to Mike. John and Mike, however, have agreed that Mike will immediately purchase the property from John after the transaction between John and the Solo 401k plan is completed. This is an indirect prohibited transaction because Mike, as a disqualified person, attempts to circumvent the prohibited transaction rules by bringing a third party (John) into the transaction.