There are a couple of ways to invest both your personal and solo 401(k) funds in real estate. Both of these options are discussed here.
Invest in Real Estate Under a Tenancy in Common (TIC)
Under this method, title is taken in both the solo 401k owner’s name and in the name of his or her solo 401k . Following is an example on how title to the property is taken assuming the name of the solo 401k is Chargers Solo 401k Trust and the solo 401k owner’s name is Matthew Brown.
Example: 30/70 split between Matthew Brown and his solo 401k plan (Chargers Solo 401k Trust)
How the property purchase is recorded: Matthew Brown, an undivided 30% interest and Chargers Solo 401k Trust , an undivided 70% interest.
Compliance Notes
- The percentage of ownership is determined by how much funds each party invests at time of real estate purchase.
- All expenses and income are shared based on the ownership percentages.
- No debt financing can be incorporate under a tenancy in common (TIC) transaction; otherwise, the transaction will be deemed a prohibited transaction.
- The property may not be purchased from or sold to a disqualified party (e.g., the solo 401k owner, his or her parents, children, to name few).
- The solo 401k owner is not allowed to use the property for personal use.
Invest in Real Estate Using a LLC
- When both the solo 401k owner (in this example Matthew Brown) and his solo 401k (Chargers Solo 401k Trust) pool their funds and invest in an LLC for the purpose of investing in real estate, title to the property is taken in the name of the LLC.
- For example, if the name of the LLC is San Diego Charges LLC, title on the deed would read San Diego Chargers LLC.
- Just like above, the LLC cannot obtain a loan and the solo 401k owner and other disqualified individuals are prohibited from using the LLC owned property for personal use.
- The LLC has to be funded for the first time (i.e.,units cannot have previously been issued), otherwise prohibited transaction implications arise.
- The LLC operating agreement should contain specific language pertaining to the 401k and investment rules.
- The LLC will be deemed a multiple member LLC so it will be treated as a partnership. Therefore, you will need to file a federal tax return (Form 1065 and K1’s–one for each member) on an annual basis.
- The LLC will require its own bank account and EIN.
