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Using a Solo 401(k) to Purchase Real Estate


 

A Solo 401(k) to purchase real estate is a wise choice. Previously, we explained how a Solo 401(k) works and how you can benefit from this plan. So you know that a Solo 401(k) was created by the IRS to specifically aid:

  • Self-employed individuals
  • Individuals who actively generate a portion of their income through self-employment activities
  • Small business owners with no employees (except for themselves or a spouse)

You may also know that the Solo 401(k) is more advantageous than using an SEP IRA, traditional IRA or SIMPLE IRA. This is primarily thanks to the employee deferral feature, which allows individuals to increase their maximum contribution. You also receive checkbook control. This way, you’re the one who administers your plan and you can give yourself a tax break in doing so.
But you know all of this by now, so let’s look at the advantages of using a Solo 401(k) to purchase real estate.

 

Purchasing Real Estate with a Solo 401(k)

Let’s go straight to the benefits.

  1. Your income and gains from your real estate investments are tax exempt, thus making it a more powerful investment. If you buy a property for $100,000 and sell it for $300,000, your $200,000 earnings are tax free.
  2. If you open a self-directed Solo 401(k), you can easily make real estate investments. Whereas most financial institution-adopted plans won’t allow real estate investments.
  3. With a self-directed 401(k) plan, you’re the trustee. In other words, as trustee, you can make any investment you want.
  4. Real estate investments are fast and easy. You only need to write a check or wire funds from your 401(k) Plan bank account and that investment is yours.

 

Is an LLC Necessary to Buy Real Estate with a Solo 401(k)?

Of course, you don’t need an LLC to buy real estate with your Solo 401(k). The Solo 401(k) Plan itself can take title of the property. In other words, the plan can own the property.
There is no requirement to establish an LLC with your Solo 401(k) Plan funds. However, buying real estate under an LLC provides asset protection. Solo 401(k) owns the LLC, and the LLC will own the property. And you’re the manager of the LLC. As manager, you have full control over your investments.

 

Why Real Estate?

After the 2008 financial crisis, people became wary of Wall Street. They didn’t feel comfortable making traditional investments they didn’t fully understand. Individuals, particularly those in the middle class, didn’t know what was happening in Wall Street. As a result, they became skeptical investing their retirement funds in traditional assets.

Real estate, however, is something most us feel comfortable with – lower class, middle class and upper class alike.

Many people worry about inflation, which is another reason they turn to real estate investments. Even if the risk of inflation isn’t real (it may or may not be), inflation can seriously hurt a retirement portfolio. The value of currency today may be worth significantly less tomorrow. Hard assets (real, touchable assets) is a way to protect your retirement plan against inflation. In a way, hard assets act as a buffer against your retirement assets and the havocs of inflation.

 

Types of Real Estate Investments

Below is a partial list of domestic or foreign real estate-related investments that you can make with a Solo 401(k):

  • Raw land
  • Residential homes
  • Commercial property
  • Apartments
  • Duplexes
  • Condos/townhomes
  • Mobile homes
  • Real estate notes
  • Real estate purchase options
  • Tax liens certificates
  • Tax deeds

Do you want to know more about how to use your Solo 401(k) Plan to purchase real estate? Contact our Solo 401(k) specialists to provide you with a consultation.

 


Did you know?

IRC 514(c)(9) will let you use leverage to buy real estate without tax in your Solo 401(k) Plan.
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