Can a Solo 401k Buy Real Estate?

If you are a small business owner, you can open a Solo 401(k), and use it to invest in your preferred investment options. A Solo 401(k) comes with lots of perks, some of which may not be available in a company-sponsored 401(k) plan. As a self-directed retirement plan, you can decide to invest your retirement savings in different types of investments such as real estate, precious metals, bonds, stocks, mutual funds, tax deeds, etc.

Generally, you can purchase real estate using Solo 401(k) funds. You can purchase different types of real estate properties such as apartments, residential properties, commercial properties, condos, and mobile homes. All expenses related to the purchase of real estate property must come from the Solo 401(k) account, and any funds used from your personal finances will be considered to be an early distribution with tax implications. Most investors use a Solo 401(k) as a tax strategy since any gains or incomes from the real estate investment are tax-deferred until you make a withdrawal, or tax-free if you are using a Roth Solo 401(k).  

Eligibility Requirements for Solo 401(k)

A Solo 401(k) is available to small business owners with no employees. However, if you are an independent contractor with part-time employees, you may still qualify to open a Solo 401(k). The business owner, his/her spouse, and bonafide partners are eligible to open and contribute to a Solo 401(k).

The Process of Investing a Solo 401(k) in Real Estate

When investing in real estate using a Solo 401(k), you should follow the following steps:

Open a Solo 401(k)

You must first open a Solo 401(k) account that will be used to purchase the real estate property. The IRS requires that all fees associated with the real estate purchase must be made using funds from the Solo 401(k) account. You should not use your personal name on any purchase-related documents.

Fund the Solo 401(k)

Once the Solo 401(k) documents have been signed and approved, you can fund the account. The Solo 401(k) account can be funded using pre-tax contributions, rollovers from traditional 401(k), or transfers from other qualified retirement plans. Funds can take 5 to 10 days from to be processed.

Determine the Purchasing Method

There are several purchasing methods that can be used when investing in real estate using a Solo 401(k). They include:

1. All-cash purchase

This method involves using cash only from the Solo 401(k) to purchase a real estate property. This means that the Solo 401(k) owns the property without any debt financing.

2.  Non-recourse loan

You can use debt financing to fund purchase of real estate property. You can obtain a non-recourse loan from a bank or other lending institution. The IRS prohibits investors from borrowing from relatives such as a spouse, natural and adoptive parents, or any business owned by the Solo 401(k) owner or family members. Also, the Solo 401(k) must have sufficient funds to meet the non-recourse loan payments.

3. LLC

Although real estate purchases can be made directly using the Solo 401(k) account, some investors may opt to create an LLC for the purchase of making the purchase. You can obtain an EIN for the LLC, which will be required to open the LLC bank account. Once the bank account becomes active, you can fund the account using Solo 401(k) money.

4. Tenant-in Common Purchase

This method allows investors to purchase real estate property using a mix of Solo 401(k) funds and personal funds. You can partner with another investor or certain family members to purchase the property; the ownership of the property will be split based on the agreement. Any expenses and incomes from the property will also be shared based on the agreed percentage between the owners.

Put offer

Once the funds are ready, you should make an offer for the property. You should list the Solo 401(k) as the buyer, since the account is a separate entity from the owner. Only the Solo 401(k) name should appear on the purchase documents.

Pay a Deposit

Use the Solo 401(k) funds to pay a deposit for the property. IRS rules require that the earnest deposit can only be paid using the Solo 401(k) and not personal funds.

Closing

As the Solo 401(k)’s trustee, you will be required to submit purchase documents at closing to the Escrow agent. You must also approve and sign the purchase agreement, and submit them alongside a check or wire transfer from the Solo 401(k) bank account.

Can You Live In A Home Owned by the Solo 401(k)?

A Solo 401(k) owner cannot live in a home or other real estate property purchased using a Solo 401(k). The owner-employee of a Solo 401(k) is considered a disqualified person by law, and hence, cannot use the property. Other disqualified persons include your spouse, your natural parents, natural grandparents, spousal lineal descendants, and ancestors. Persons who are considered qualified to live in the property include sisters, brothers, aunts, uncles, and cousins, who can live in the property and pay rent directly to the Solo 401(k).