By: George Blower
September 17, 2017
Last Updated: July 15, 2020
Invest in Real Estate QUESTION:
Do the IRS rules allow for a solo 401k to be invested in real estate?
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?
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.
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).
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/
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?
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)?
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?
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?
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?
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.”
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?
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?
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?
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?
Good afternoon, Can the depreciation allowance for rental property held by the solo 401k be used in for personal income deductions?
Proof of Trust QUESTION:
Liability Protection QUESTION:
Two Participants QUESTION:
Invest in Foreign Real Estate Directly or through an LLC QUESTION:
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.
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?
- 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.
- 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?
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?
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.
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?
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?
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.
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.
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.
- 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.
Brother’s son work on property QUESTION:
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:
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:
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?
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?
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?
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?
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?
Correct. No state tax return applies until taxable distributions commence since the property is owned by the solo 401k plan.
Tax Reporting QUESTION:
So if the Trust takes title to real estate in its own name, how does it report income, taxable or non-taxable, to local municipalities or state taxing authorities?
In short, such transactions are not re-portable because the property is owned by the solo 401k trust. On the other hand, when you take distributions (usually at retirement) from the solo 401k plan including in-kind distributions, reporting and taxes would apply.
Purchase House Next Door QUESTION:
Yes the rules allow for the purchase of a rental property (whether situated next door or not) using IRA funds provided neither you nor certain family members already own the home.
IRS Documents for Purchase QUESTION:
1) Nothing needs to be filed with the IRS.
Purchase Third-Party Owners Real Estate Interest QUESTION:
Joint Venture Investment QUESTION:
- Please keep in mind that you can’t work on the property yourself and if you do a high volume a fix and flips (e.g. more than 2 per year) the IRS may attempt to tax as a business (Unrelated Business Income Tax).
- The property must be purchased from an unrelated person and then rented or sold to an unrelated person.
Improve Land QUESTION:
Hire my Self-Employed Business LLC QUESTION:
Real Estate Documents Including Rental Agreement QUESTION:
You are not required to submit property documents to your solo 401k provider.
Documents in connection with the rental property (e.g. recorded deed, rental agreements, property insurance contracts) are for your records as the trustee of the plan.
California Form 593-C Real Estate Withholding Certificate QUESTION:
In Part I make sure to list the solo 401k plan name as the seller, enter the employer identification number (EIN) and the address for the solo 401k , the address of the proper being sold.
In Par II, check off “The seller/transferor is an insurance company, individual retirement account, qualified pension/profit sharing plan, or charitable remainder trust.
In-Kind Distribution Under COVID-19 QUESTION:
No. Reason being, the distribution exception found under the CARES Act (COVID-19) is for cash distributions not for asset distributions. Also, the cash distribution must fall under a CRD exception (see Section 2202(a)(4)(A)(ii) of the CARES Act). The cash withdrawal will be penalty free (i.e., it is not subject to the 10% early distribution penalty). The distribution limit is $100,000 and must be made between January 1, 2020 and December 31, 2020. Visit here to lean more.
Form 1099-S QUESTION:
While a Form 1099-S, Proceeds from Real Estate Transaction does get issued to report the sale or exchange of real estate including property held in a self a self-directed solo 401k, the solo 401k trustee is not required to file Form 1099-S with the IRS if the property is wholly owned by the solo 401k plan. Reason being, a solo 401k plan is a tax sheltered vehicle (the funds grow tax deferred until distributions commence), as long as proceeds from the sale flowed back to the solo 401k plan.