Invest in Real Estate Tax-Free with a Solo 401k

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May 16th, 2011

Did you know that funds in a 401K account may be invested in real estate? They can! Many people don’t realize that. That is because 401K accounts are traditionally set up with financial institutions that have the incentive to invest such funds in stocks, bonds and mutual funds due to, among other things, higher commission fees. On the other hand, if you are eligible to set up a Solo 401K, you will have “checkbook control” and will be able to invest such funds in real estate in addition to stocks, bonds and other traditional securities. The same, incidentally, is true for a Self Directed IRA, Self Directed Real IRA and a Self Directed Roth IRA.
A significant advantage of setting up a Solo 401K Plan to invest in real estate is that income or gains generated by a Solo 401k Plan generate tax-deferred/tax-free profits. Using a Solo 401K Plan to purchase real estate allows the 401K to earn tax-free income/gains and pay taxes at a future date, rather than in the year the investment produces income. Therefore, with a Solo 401K, you can invest tax-free and not have to pay taxes right away – or in most cases for many years allowing your retirement funds to grow tax-free! All the income or gains from your real estate deals flow through to your 401K account tax-free!

The IRA Financial Group can assist you with setting up a Solo 401K Plan. Purchasing real estate with a Solo 401K Plan is essentially the same as purchasing real estate personally, and involves the following steps:

• Establish an IRS compliant Solo 401K Plan .
• Identify the investment property.
• Have the Solo 401K Plan purchase the investment property – there is no need to seek the consent of the custodian with a Solo 401K Plan since you serve as Trustee and Plan Administrator.
• Since the Solo 401K Plan is investing in the property, title to the investment property and all transaction documents should be in the name of the Solo 401K Plan. Documents pertaining to the property investment must be signed by you as Trustee.
• All expenses paid from the investment property go through the Solo 401K Plan. Likewise, all rental income checks must be deposited directly in to the Solo 401K Plan bank account. No Solo 401K related investment checks should be deposited into your personal accounts.
• All income or gains from the investment flow through to your Solo 401K tax-free!

Moreover, unlike a Self Directed IRA LLC or a Self Directed IRA Real Estate, using a Solo 401K to finance a real estate investment with non-recourse debt will not trigger Unrelated Business Income Tax (UBIT) – which imposes a tax in the range of 35% on all income/gains relating to the debt financed portion of the investment.

One benefit of a sagging economy is that real estate is prime for the taking! Investing in real estate now at bargain prices can therefore be a wise and profitable business decision once the economy rebounds.

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