New Solo 401(k) Plan Solution to allow real estate investors to use financing to purchase real estate without tax or penalty.
IRA Financial Group, the leading provider of self-directed Solo 401k plans announces the introduction of its new specially customized Solo 401(k) Plan for real estate investors which allows plan participants to use non-recourse financing for a real estate investment without triggering a tax or penalty. The tax attorneys have worked diligently to establish a specially customized retirement plan for real estate investors seeking to use leverage. In general, one may obtain financing through a loan or mortgage to finance a real estate purchase using a Solo 401(k). Solo 401(k) participants can also borrow up to either $50,000 or 50% of their account value – whichever is less to help finance a real estate investment. “With IRA Financial Group’s Solo 401(k) Plan a plan participant can use non-recourse financing to acquire real estate and not pay and tax or penalty,“ stated Adam Bergman, a tax attorney with the IRA Financial Group. “The great thing about using a Solo 401(k) Plan to buy real estate is that you can use leverage to increase the potential gains from the real estate investment,” stated Mr. Bergman.
When using a loan to purchase real estate with a Solo 401(k) Plan, the loan must be a non-recourse loan. “A non-recourse loan is not a traditional mortgage as due to the IRS prohibited transaction rules, the 401(k) plan participant cannot personally guarantee the loan,“ stated Mr. Bergman.
Under Internal Revenue Code Section 4975, a “prohibited transaction” is a transaction that, directly or indirectly involves the loan of money or other extension of credit between a plan and a disqualified person. Normally, when an individual purchases real estate with a mortgage, the traditional loan provides for recourse against the borrower (i.e., personal liability for the mortgage). However, if the 401(k) Plan purchases real estate and secures a mortgage for the purchase, the loan must be non-recourse; otherwise there will be a prohibited transaction. A non-recourse loan only uses the property for collateral. In the event of default, the lender can collect only the property and cannot go after the 401(k) Plan itself.
The advantages of using a Solo 401(k) Plan to purchase real estate is that a Solo 401K non-recourse loan can be used which could help leverage the property without triggering any tax or penalty. In contrast if using a self directed IRA LLC to purchase real estate, a tax would be imposed on the debt-financed portion of the property being purchased pursuant to Internal Revenue Code Section 514. Whereas, in the case of a Solo 401(k) Plan, pursuant to Internal Revenue Code Section 514(c)(9), the Unrelated Business Income Tax (UBTI) would not apply when using non-recourse leverage as part of a real estate transaction (unrelated debt-financed income – UDFI). “Therefore, unlike a Self-Directed IRA LLC, using a Solo 401(k) Plan to finance a real estate investment will not trigger UBTI – which imposes a tax in the range of 35% on all income/gains relating to the debt financed portion of the investment,” stated Mr. Bergman.
IRA Financial Group is the market’s leading provider of self-directed IRA and solo 401(k) plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.