Question:
I have over $100,000 in my Solo 401k and want to take a $50,000 401k loan. If I use the proceeds of my Solo 401Ik loan to purchase land intended to build a house for primary residence, can the term of the loan be longer than 5 years? Must there by a residence already on the property, or does a vacant lot count?
Answer:
Generally a 401k loan must be repaid within 5 years. The 5 year repayment requirement does not apply to any loan used to acquire any dwelling unit which within a reasonable time is to be used as the principal residence of the participant. [Internal Revenue Code Section 72(p)(2)(B)]
A vacant lot is not a dwelling unit – i.e. a building where someone could sleep, eat and reside.
Moreover, given the time that that will take to construct a home on the vacant lot, it will likely be a significant amount of time before the house will be used as your principal residence.
Therefore, purchasing the lot does not qualify for the principal residence loan exception to the 5 year repayment requirement. As a result, while you can use the proceeds of your 401k loan to buy a vacant lot, the loan must be repaid within 5 years.
