Purchasing/Investing in Real Estate with a Self-Directed Solo 401(k)

Updated: Mar 30

With a self-directed solo 401(k), also known as an individual 401(k), you as trustee, may purchase many types of real estate investments to be owned by/held in your solo 401(k). For example, your solo 401(k) may hold/purchase land, residential or commercial properties, or tax liens, to name a few.

Vacation rental held in a self-directed solo 401(k)

If you don’t have enough in the account to purchase the property in full plus pay the on-going expenses related to the property, the solo 401(k) rules allow you to combine personal funds through an arrangement called a Tenancy-in-Common Ownership (TIC) with your solo 401k to make the purchase. The rules further permit your solo 401(k) to borrow from a bank or private lender to help complete the purchase. The loan cannot be a traditional mortgage loan, etc., however, since they are based on your personal collateral. Instead, your self-directed solo 401(k) can only take out a non-recourse loan. See definitions for each below.


These are the basic steps required to make a real estate investment using a solo 401(k):

  1. Determine price range and whether or not your solo 401(k) will need to obtain non-recourse financing or participate in a TIC transaction.

  2. Choose the property that you want to invest in.

  3. If your solo 401(k) will borrow money, find a lender and settle on the terms of a non-recourse loan.

  4. Make an offer to the seller and wait for acceptance.

  5. Have a third party (an attorney or title company) draw up the real estate purchase documents and TIC documents, if needed.

  6. Ensure that your solo 401(k) is listed as the buyer and confirm that the seller understands that you are making the purchase through your solo k.

  7. Be sure that all expenses and income/gain go out of and into the solo k account and that you do not do any work on the property yourself.

You as trustee of your solo 401(k) must retain the following forms and documents (copies) in connection with the purchase:

  • Purchase Contract

  • Settlement Statement/ALTA

  • Escrow Instructions

  • The preliminary (un-recorded) Deed

  • Non-recourse loan and/or TIC documents as applicable

  • As trustee of your solo 401(k), you will sign and return the documents to the title/escrow agent and wire funds from the solo 401(k)’s checking account for the purchase.

Keep in mind that the above process assumes that you adopted a self-directed solo 401(k) with a plan provider whose plan documents allow you to be the trustee and self-direct your plan’s solo 401(k) investments instead of going through a custodian. A custodian will have their own procedures to follow and will retain the real estate documents, which will incur a holding fee.


Definitions:

Tenancy-in-Common Ownership (TIC) allows you to buy real estate with personal funds and solo 401(k) funds. You and the solo k will each own a specific percentage of the property based on the amount each contributes to the purchase. As a result, the income and expenses associated with the investment will be shared proportionally based on the ownership percentage. This type of arrangement also allows you to invest your solo 401(k) with other disqualified persons such as your spouse or parents. Again, the key is to adequately reflect each investor’s percentage of ownership on the paperwork and that the expenses and income are proportionally and accurately shared by each party to the transaction.


Non-recourse loans allow your solo 401(k) the ability to take a loan from a financial institution or an investor to complete a real estate purchase. If the loan is not paid back by your solo 401(k) as required, the lender may take the solo 401(k)-owned property since it is used to secure the debt as collateral. The lender may not, however, have claim over any other assets in your solo 401(k). Basically, your solo 401(k)-related loan can never affect any assets in the plan other than those used to secure the loan.



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