With a Solo 401K Plan, one is permitted to use his or her retirement funds to make traditional as well as non-traditional investments such as real estate. When purchasing real estate with a Solo 401K Plan, it is important to keep a few things in mind:
- The real estate investment should not involve a disqualified person. Pursuant to IRC 4975, a disqualified person is essentially, the 401(k) Plan participant, 401(k) trustee, a lineal descendant of the Plan participant (i.e. grandparent, parent, spouse, child, daughter-in-law or son-in-law or entity own greater than 50% by such persons).
- No disqualified person should personally benefit directly or indirectly from the 401K investment. Thus, the disqualified person can not receive any personal benefit from the 401(k) transaction, including any sales commissions or fees.
- Title to the purchased real estate should be in the name of the 401(k) Plan or the name of the 401(k) Plan trustee for the benefit of the 401(k) Plan. The title to the property should not be in the name of the individual plan participant.
- All real estate related expenses, including improvements and taxes should be paid by the 401K plan. If additional funds are needed, the 401K plan participant can always contribute additional funds to the 401K Plan.
- If financing is used to purchase the real estate investment, the loan must be non-recourse. A non-recourse loan is a loan where there is no personal guarantee made in the case of a default. Unlike a Self Directed IRA, when using non-recourse debt to make the real estate purchase, no taxes will be imposed on any income or gains generated by the investment attributable to the debt-financed portion of the property (the percentage of debt to overall price of the overall acquisition price).
- When making the real estate purchase, only 401(k) funds should be used, including in connection with the payment of closing costs.