Solo 401k Real Estate Investment FAQs

Invest in Real Estate QUESTION:

Do the IRS rules allow for a solo 401k to be invested in real estate?

ANSWER:

Yes a solo 401k also known as a self-directed 401k may be invested in real estate provided the solo 401k provider’s plan documents allows for it. A solo 401k plan offered by a company like My Solo 401k Financial is one such plan that allows for investing in real estate.

Although the IRS does provide a list of approved investments for solo 401k retirement plans, there are special rules contained in the Employee Retirement Income Security Act of 1974 (ERISA) that apply to retirement plan investments.

In addition, under the Code, both self-directed 401k accounts and IRAs cannot invest in collectibles, such as art, antiques, gems, coins, or alcoholic beverages, and they can invest in certain precious metals only if they meet specific requirements. (IRC Section 408(m)).

Personal Use QUESTION:

Can I live/use the solo 401k owned house/home for personal use, even just once in a while?

ANSWER:

N0. Certain transactions between a solo 401k plan and a “disqualified person” are specifically prohibited by law (see below). These same rules apply to transactions between an IRA a disqualified person. Therefore, because you are an owner-employee who participates in the solo 401k plan, you fall under the “disqualified person” definition. Other disqualified persons include members of your family such as your spouse, ancestors, lineal descendant, or any other spouse of lineal descendant. For a sample list of “qualified vs disqualified persons” CLICK HERE.

What is more, neither you nor any disqualified party may live/use the solo 401k owned property even if it is just once a year or if you pay market rate rent to the solo 401k plan. Simply stated, the solo 401k real estate investment has to be hands off.

Mother-in-law QUESTION:

You asked if it would be a prohibited transaction if you purchased a home with funds from your solo 401k account and rented it to you mother-in-law. (your mother would pay rent to the solo 401k).

ANSWER:

As we discussed, your mother-in-law would not be a disqualified person; therefore, the scenario you describe would not be a prohibited transaction under the rules as long as the rental payments flowed back into the solo 401k account directly and that you retain documentation showing that renting to your mother-in-law is on an arms length basis. 

See more information: https://www.mysolo401k.net/self-directed-401k-real-estate-questions/

Commission QUESTION:

I’m a real estate agent/broker, can I receive a commission if I represent my solo 401k in the purchase of a house/building?

ANSWER:

No you cannot receive a commission for representing the solo 401k in either the purchase or the sale of real estate. Reason being, you fall under the “disqualified person” definition; therefore, neither you nor your business can personally benefit as a result of a solo 401k real estate transaction. Such transaction would be in violation of the following and specific prohibited transaction found in the IRS code.

“The receipt of consideration by a fiduciary for his or her own account from any party dealing with the plan in a transaction that involves plan income or assets.”

Lastly, none of the other disqualified persons mentioned in prior questions above may receive a commission if they represent your solo 401k in a real estate investment.

Perform Repairs QUESTION:

For rental properties owned by my solo 401k plan, can I personally perform any of the repairs (e.g., fix a leaky toilet, paint the property, patch up drywall, or fix a leaky roof)?

ANSWER:

Good question and it is one that we often field; however, neither you nor “disqualified persons” may perform any sweat equity work on your solo 41k owned house/building because you are considered a “disqualified person.”  This is true even if you do not get compensated by the solo 401k.

However, because you are the trustee of the solo 401k, you are required to look after the assets of the solo 401k. Therefore, in the context of real estate owned by your solo 401k plan, you may manage the real estate owned house/building provide you do not receive any compensation for doing so. Managerial functions include collecting rent checks, arranging for contractors, writing checks from the solo 401k bank/brokerage account to pay for property taxes on the solo 401k owned property, for example.

Travel Expense QUESTION:

Can the solo 401k pay for my travel expenses. For example, if I need to fly to the location to view the house/building that I plan to invest my solo 401k funds in can I book a car and hotel too?

ANSWER:

No. While certain expenses (e.g., property taxes, cost for repairs, etc.) associated with the the solo 401k house/building investment must be paid with funds from the solo 401k account funds, travel expenses and meals are not allowed to be paid with solo 401k funds.

Sells Existing Home QUESTION:

Can I sell my existing house owned by me or my business into my solo 401k plan?

ANSWER:

No. If you or your business sale a house/building to your solo 401k plan, it will be in violation of the following prohibited transaction rule, which also applies to other disqualified persons.

“The sale, exchange, or lease of property between a plan and a disqualified person.”

Lastly, the same is true vice versa-meaning, neither you nor other disqualified persons may buy an existing house/building owned by your solo 401k as this would also be in violation of the solo 401k prohibited transaction rules.

Loan Money QUESTION:

Can I loan money to my solo 401k for investing in a house/building?

ANSWER:

Good question, but it is prohibited for you or any “disqualified person” to loan money to your solo 401k for any reason including investing in real estate.

Such transaction would be in violation of the following prohibited transaction rule.

Lending money or extending credit between a plan and a disqualified person.”

However, your solo 401k can obtain a non-recourse loan from a third-party or bank. For a list of banks that will loan funds to a solo 401k, VISIT HERE.

Lenders List QUESTION:

I am starting to look at properties and know that I am going to leverage with a mortgage and I know I can only use Non-recourse loans and never standard mortgages. So do you have a list of banks/mortgage brokers that I can contact to find out about getting my first one?

ANSWER:

Yes there are banks and hard money lenders that will loan funds to a solo 401k and/or an IRA on a non-recourse basis. For a list of some, VISIT HERE.

Buy from Solo 401k QUESTION:

Can I buy a property (house/building) from my solo 401k?

ANSWER:

No. Reason being, it is prohibited for the solo 401k owner/participant to purchase property from his or her solo 401k plan. This would result in violation of the following prohibited transaction rule:

“Sale, exchange, or leasing of property between a plan and a disqualified person.”

What is more, this same rule applies to round-about/straw-man transactions. For example, you cannot have your solo 401k sale the property to a third-party and you then turn around and buy it from that third-party.

However, you could take an in-kind distribution of the solo 401k owned property. To learn more about this, CLICK HERE.

 In-kind Transfer of IRA Property QUESTION:

Can I transfer a rental property currently held in my self-directed IRA to a self-directed solo 401k?

ANSWER:

Good question. Because the IRS IRA rules allow for the transfer/direct rollover/rollover of IRAs, yes you can transfer existing IRA assets including rental property (e.g., family home, commercial building, etc.) from a self-directed IRA  into the solo 401(k) as an in-kind transfer (i.e. you won’t have to sell). We would handle the transfer process as part of our services for no additional charge. Simply stated, the IRS rules allow for the transfer of assets in addition to cash from IRAs to a solo 401k plan. To learn more about the IRA in-kind transfer rules, visit IRS Publication 590.

Convert to Roth QUESTION:

My self-directed solo 401k owns a rental property. Can I partially (over 4-5 years) roll it over to a Roth self-directed 4o1k and pay tax on it over those years?

ANSWER:

Excellent question!

Yes and this is known as an in-kind conversion of an asset. Certain rules apply such as: 
an appraisal is needed each time you convert part of the asset to the Roth solo 401k;
the deed will need to be re-recorded each time to list the new ownership percentages;  
taxes apply to each amount converted in the year of the conversion; and in addition to completing an in-kind Roth solo 401k conversion form, a 1099-R will need to be issued each year to report the partial conversion amount, which we can assist since we are the self-directed solo 401k provider.

Depreciation QUESTION:

Good afternoon, Can the depreciation allowance for rental property held by the solo 401k be used in for personal income deductions?

ANSWER:

Hi and no as real estate owned by a retirement account cannot be depreciated.

Proof of Trust QUESTION:

As we move forward with the purchase of our 1st investment property utilizing our solo 401k trust we’ve been asked by the title company to provide proof of trust.  Can you all advise what should I utilize as proof of trust.

ANSWER:

When a solo 401k is int the process of  purchasing a house/building, you will want to provide the title company the 7 page “Trust Agreement” and the EIN letter for the solo 401k trust.

Liability Protection QUESTION:

Hello, I will be using my solo 401k this fall to purchase a property.  Is there a way to gain some liability protection like i have when i purchase property with my LLC?

ANSWER:

Yes by getting property insurance. This insurance cost would be paid with funds from the solo 401k since the property would be owned by the solo 401k plan. The policy can be titled just in the name of the trustee or as follows:
For EXAMPLE: If your name is Scott Byrd and the name of your solo 401k plan is Chargers Solo 401k, title would read as follows:
Scott Byrd, Trustee of Chargers Solo 401k

Recording QUESTION:

I am closing on my first property purchased under my 401k.  As advised, the documents show the 401k as the purchaser.  Earnest money and cash purchase was was made out of funds from my 401k trust bank account.  Is there anything else I need to do?

ANSWER:

Make sure the deed gets recorded in the name of the solo 401k plan.

1099 QUESTION:

My wife has an existing solo 401k plan with you which we has rental properties in it.
We are currently setting up one property with a Section 8 for a disabled tenant. They are wanting tax info to issue a 1099 form at the end of the year.
Do I list it as tax exempt or do I get the 1099 under the Solo 401k Trust name?

ANSWER:

Since the solo 401k plan will own the property, you need to list the plan name on the W-9 and use the plan’s EIN.  For number 4 “Exemptions” enter exempt payee code 1. This will result in them issuing the 1099 in the name of the solo 401k which means the rental income that flowed back to the solo 401k plan continues to preserves its tax-sheltered status.

Two Participants QUESTION:

My wife and I are starting to look at real estate investments overseas. We each participate in the same solo 401k plan. Is it possible for us to use both of our solo 401k funds to purchase a single property and if so, what is the process for doing so?

ANSWER:

Yes, you can pool solo 401k funds from both your respective participant accounts under the plan.  The funds to purchase the real estate should come from both accounts (e.g. two wire transfers or two checks).  The property would be titled in the name of the Solo 401k (e.g. Joe Smith and Jane Smith, Trustees of Chargers Solo 401k Trust).  While the ongoing income and expenses can be received & paid through one participant account for administrative convenience, the two Solo 401k sub-accounts need be reconciled (in accordance with the same ratio of the funds initially used for the purchase) on at least an annual basis and certainly before any distributions are taken.

Additionally, from a solo 401k perspective, the procedures for investing in foreign real estate are the same as they would be if you were investing in domestic real estate.

The exception with investing in foreign real estate is that local rules and regulations will also apply.  Therefore, we suggest working with a local attorney in the country where you are buying the real estate to ensure local regulations are followed. The key is to ensure that the solo 401k ownership is reflected in any documents and does not refer to any personal ownership.  For additional information, please review the following link: https://www.mysolo401k.net/solo-401k-foreign-investment-rules/

Cash Withdraw QUESTION:

I have a worker who will be doing some repairs on the solo 401k owned house who requires payment in cash.  Would it be an issue to withdraw cash out of the trust account for this?  I will record the transaction appropriately for tax purposes but not sure if this was allowed.

ANSWER:

While repair expenses in connection with a solo 401k owned house must be paid with solo 401k funds since the house is owned by the solo 401k plan, and technically such expense can be paid with cash instead of by check or using a debit card that was issued in the name of the solo 401k plan, it is best not to pay such expense with cash as the solo 401k could be more heavily scrutinized in the event of an IRA compliance review or audit. Reason being, when such expenses are paid by the solo 401k, the funds must flow directly to the worker/contractor. On the other hand, if you pay with cash, the cash first touches your hands. If you do decide to proceed with paying in cash, make sure you have the necessary documents (e.g., atm receipt, invoice for work done, etc.) to confirm such payment.

LLC for solo 401k QUESTIONS:

My husband has a self directed IRA and we are looking to combine funds from my Solo 401k and his IRA to purchase a new property.  Are there any issues with us creating an LLC with the IRA and Solo 401k to do so?  Are you able to help with this and if so, how long does it take and what is the cost?

ANSWERS:

Yes this can be done and the following applies:
  • A newly created LLC is required and both the self-directed IRA and solo 401(k) funds must be invested in the LLC at the same time.
  • This will be deemed a multi-member LLC which means that an annual federal tax Form 1065 must be filed as well as a K-1 for each retirement account.
  • Form 1065 applies when you have multiple retirement accounts invested in the same LLC. Whiled this tax return is for informational purpose and will not subject the retirement accounts to annual taxes since retirement accounts are tax-shelter vehicles and the gains from investing in rental properties are sheltered from taxes until retirement account distributions commence (usually at retirement age).
  • Yes we offer the LLC creation service, and we charge a fee. The LLC registration fee charged by the state is passed on to you.
Our LLC services include the following:
  • Filing Articles of Organization with Secretary of State.
  • Obtaining The Employer Identification Number for the LLC from the IRS.
  • Drafting of the LLC Operating Agreement that contains the required IRA, solo 401k and IRS language.
  • Assistance in establishing the LLC bank account at your local bank/credit union of your choice.
  • Consulting with the IRA and solo 401k regulations.

Lend Fund to My Solo 401k QUESTION:

Are we able to purchase a house, for investment, with solo 401k money while personally providing the funds for fix up?  When the property is sold, are we able to recoup our fix up money or would the 401k need to provide all the funds involved?

ANSWER:

Good question. No you cannot use personal funds to pay for costs to fix up the solo 401(k) since the property is owned by the solo 401k. That would be considered a prohibited transaction.

TIC and Live in Unit QUESTION:

Can we purchase a multi family home as tenants in common with the Solo 401K and live in one of the units?

ANSWER:

No you cannot have access to the property for personal or business use because the solo 401(k) is also an owner of the property.

Sell Real-Estate Owned Property to  My Solo 401k QUESTION:

Can I sell (well below market value) or even quit claim real estate that I already own to the Solo 401K to collect rent to build the retirement account? This would be investment property that I already own, not my primary residence.  I would obviously need to run that scenario by my accountant too for tax implications, but wanted to know if that is a prohibited transaction as well.

ANSWER:

No you certainly cannot transfer property that you personally own to the solo 401(k) regardless of whether you sell it at or below market value. Such transaction would be in violation of the following solo 401k prohibited transaction rule.

Sale, exchange, or leasing of property between a plan (e.g., Solo 401k plan) and a party in interest (your or your business).

Seller Financing QUESTION:

I have a question. I am planning on buying a property with my solo 401K. I will be paying cash. I will then be selling the same property on seller financing. Is there anything extra or anything I need to be concerned with doing this?

ANSWER:

Such transaction would require the note payments to flow back to the solo 401k. Essentially it would result in a solo 401k promissory note secured by real estate.

Remitting the 20% Mandatory Federal Tax Question

I’m contemplating taking a distribution from the my solo 401k. Am I responsible for remitting the 20% Federal withholding or will your company initiate that for me?

ANSWER:

Because we don’t have access to our client funds, the client is responsible for submitting the 20% mandatory federal tax to the Department of the Treasury by the 15th of the following month.

See the following for more information: https://www.mysolo401k.net/making-solo-401k-distributions/

Also, statutory rules apply when taking distributions from a 401k including a self-employed solo 401k. Please see the following.

  • If you are over age 59 1/2, you can distribute any amounts.
  • If you are not over age 59 1/2, you can generally only distribute any amounts that were transferred/rolled over to the solo 401k from other retirement plans and/or IRAs.

Income QUESTION:

Please send me insurrections for my tax preparer on how to treat income from my solo 401k property income. He is still struggling with it.

ANSWER:

Rental income generated from properties owned by the Solo 401(k) plan flow back to the solo 401(k) which is a tax-deferred vehicle. Therefore, the income generated from the Solo 401(k) owned real estate does not get reported on neither your business nor personal tax return.

Pooling Both Participant’s Funds QUESTION:

I read through FAQs on your website but just want to confirm:I am using fund in my Solo 401(k) to purchase SFR rental property.  The fund within the Solo401(k) comes from two accounts benefits me and my wife.  In essence, the Solo 401(k) will enter into a tenants-in-common (TIC) transaction using all cash.  

Question: How should the deed read?

ANSWER:

Good question. TIC wouldn’t apply in this scenario where all funds are coming from the same solo 401k plan. In this case, since you are both participating in the same solo 401k plan, you both can fund the real estate investment out of each of respective Solo 401k participant accounts. This will result in the following:
  • Income from the investment must be split proportionally to the initial investment.
  • All expenses on the investment property must also be split in the same manner. To simplify paying for expenses, you can pay out of one Solo 401k account and balance the books for both Solo 401k accounts by end of year.
Following is how the deed is titled when both spouses are participating in the same plan and invest their respective solo 401k funds in the same property.
“Nolan Ryan, and Susan Ryan,Trustees of Astros Solo 401(k) Trust”
Essentially, both trustees are listed on the deed.

Brother’s son work on property QUESTION:

Can my brother’s son to work on an investment property held by the 401K Trust?

ANSWER:

The solo 401k participant’s  brother’s son may work on real estate held by the solo 401k Trust provided that he is paid a fair market price for the services provided.

Security deposit QUESTION:

How and where should I keep the security deposit for a rental agreement on a property held by my 401k trust?

ANSWER:

The security deposit for the rental agreement on a property held by the 401k trust will go into the the solo 401k account. The tenants will make the check payable to the solo 401k.

State Taxes QUESTION:

I have some questions please.  My Solo 401K entered into partnership with another entity. We purchased property and now have sold it.
Am I correct that the trust does not pay any taxes other than the state tax?
Do I need to file anything at year end?  Profit was around 50K.
This is my first sale in this entity and want to make sure I do it correctly.

ANSWER:

Since a solo 401k is a tax sheltered vehicle, the proceeds from the sale of the property will flow back to the solo 401k and grow on a tax deferred basis; therefore, neither state and nor federal taxes would apply at this time. Taxes will apply once you commence solo 401k distributions, generally at retirement.

UBIT on Real Estate Fund QUESTION:

I think I understand the distinction with respect to direct real-estate ownership and UBTI on IRA’s vs solo401ks.  However, I’m a little confused how it relates to an investment in a fund that invests in real estate.  Does the fact that I invest indirectly through membership in a fund mean I am investing in real estate, or is that considered investing in an operating company?  Does the distinction between solo401k and IRA exist for those kind of investments?

ANSWER:

It depends on the activity of the LLC in which the retirement funds are invested.  If the activity of the LLC is an active business (e.g., perhaps high volume of flips, Airbnb, etc), the Investment may be considered an investment in a business in which case the income attributable to investment will likely be subject to UBIT (unless the entity is taxed as a C Corp) regardless of whether the investment is via a Solo 401k or IRA.  If the activity is passive real investing the investment will generally only be subject to unrelated debt finance income tax if the entity incurred debt to make the investment and the investment is via an IRA.
I don’t see that you are a client.  If you are self-employed with no employees working for you you can establish our Solo 401k plan. Otherwise, we can help you with our IRA LLC.
Please submit the applicable application at the following link:

Flow of Rent Deposits QUESTION:

Can my tenants deposit the rent payments into my business bank account and then I will deposit the funds into my solo 401k bank account?

ANSWER:

Since the property is owned by the solo 401k plan, the funds must flow directly to the solo 401k bank account not first to your self-employed business or personal bank account.

Seller Financing by Solo 401k QUESTION:

I am selling a property out of my solo 401K and was wondering if the 401K could carry a note on the property? Are there any special requirements?

ANSWER:

Yes the solo 401k can carry the note (seller financing) on the property being sold out of the solo 401k as long as the buyer of the property is not a disqualified party (e.g., you, your spouse, your parents, your children, etc.).

Sweat Equity QUESTION:

I want to invest 100% of the solo 401k account into real estate.  Other than not getting involved with any family members (this is a rehab project with a business partner), do I have any restrictions?

ANSWER:

Yes the Solo 401(k) plan can be invested in real estate. Title to the property would be taken in the name of the Solo 401(k) plan.

You would not be allowed to do any of the rehab work  and would be limited to doing managerial functions like collecting the rent checks and hiring contractors provided you will not receive a fee for doing so.

California Tax Return QUESTION:

If the solo 401k trust buys an income producing property in California, will it be required to file a California income tax return?  I read somewhere that because the plan is tax-exempt it does not need to file federal or state tax returns, except for the filing of FORM 5500EZ when plan’s assets exceed $250K.  Am I correct in assuming that no California State Income Tax Return would be required to be filed?

ANSWER:

Correct. No state tax return applies until taxable distributions commence since the property is owned by the solo 401k plan.

This information is for informational purposes. For information specific to your investment situation, MySolo401k.net recommends consulting with a qualified tax advisor, CPA, financial planner or investment manager. MySolo401k.net is 401k provider; therefore, it does not offer investment or tax advice, nor sell investments.

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