There are unique rules to keep in mind when using a self-directed solo 401(k) for real estate investments. Here are 6 of the most common questions that we get regarding the dos and don’ts.
1) When I buy the property is it in my name?
A. No, any property held in the solo k must be purchased/held in the name of the solo k. Your plan will own the property, not you personally. Here is an example of how title is usually taken: Jane Doe, Trustee of ABC Company Solo 401k Plan
2) When I sell a property that has been in owed by my plan and the money goes back into my solo k account, do I need to report the gain to the IRS?
A. No, the pre-tax solo k is a tax-deferral account. So, any rental income and/or gain from a sale will go back into the account tax deferred. Gains and income will only be taxable when you make a withdrawal (or distribution) from the account, generally in retirement. The tax reporting occurs when the withdrawal is made.
3) My spouse is a real estate agent; can she earn a commission on the purchase/sale of a property held by my solo k since it is paid to her after tax?
A. No, since your wife is a disqualified person, she cannot earn a commission related to a purchase/sale held by your solo k, even if it has already been taxed. It would be considered to be a benefit to you, personally, which is prohibited.
4) Can I flip houses using my solo k?
A. Technically, yes, the IRS does not disallow this. BUT, it is highly recommended that the volume be kept to 2 flips or less per year. If it is more, the IRS could see it as a business taking place within the solo k. Business activity within the solo k is subject to Unrelated Business Income Tax (UBIT), which can be very high and could greatly reduce the gain from the investment. If you want to do more than 2 flips a year, you will want to do this outside of the solo k.
5) Are there any restrictions as to who my plan can purchase property from and who I can sell it to?
A. Yes, your plan can not buy from or sell to a “related” or otherwise “disqualified” person. In addition, the property cannot be rented or leased to a disqualified person.
6) When my plan buys a property, do I need to give you the documents to hold? Do you need to approve it first?
A. No and no. You are the custodian and the trustee for the plan, so you are responsible for deciding on the investment and maintaining all documents for the plan and all investments held in it. That said, I always recommend that my clients talk to me before going in on an investment to help ensure that they are not engaging in a prohibited transaction or investing with a disqualified person because doing so could be detrimental to their whole account.
These are just a few of the many parameters to stay within when holding property in a self-directed solo 401(k). If you have any other questions that you would like answered, please contact us for more information.