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Using a Solo 401(k) to Purchase Real Estate

Purchase Real Estate with a Solo 401(k)

You can purchase real estate with a Solo 401(k) plan depending on where you establish your plan. For example, if you establish your plan at a traditional institution, such as Vanguard, you will not be able to use your Solo 401(k) to buy real estate in every state. Traditional institutions do not make money unless you invest in their products, which include traditional investments like stocks and bonds.

If you establish your Solo 401(k) account at a self-directed facilitation firm, such as IRA Financial, you will be able to purchase real estate with your Solo 401(k). Self-directed facilitations, such as IRA Financial, do not sell products – they offer open-architecture plans by establishing and administering the plan for you.

When you purchase real estate with a Solo 401(k), you benefit from:

  • Tax-exempt income and gains, making it a more powerful investment
  • Tax-free earnings – buy property for $100,000 and sell it for $300,000, don’t pay taxes on your $200,000 earnings

Establish a Solo 401(k)

To purchase real estate, you must first establish a self-directed Solo 401(k) plan and gain checkbook control. At IRA Financial, you can establish your plan with a specialist by phone, email, regular mail or the new IRA Financial app.

How does it work?

  1. Your assigned Solo 401(k) plan tax specialist will work with you to customize your Solo 401(k) plan based on your investment.
  2. You can open the new Solo 401(k) plan account at any local bank or financial institution.
  3. Fund the Solo 401(k) plan with a rollover of any pre-tax retirement funds, or by making a tax-deductible or after-tax contribution directly to the new plan account.
  4. All income and gains you generate by the Solo 401(k) plan investment will generally flow back to your Solo 401(k) plan without tax.
  5. No annual IRS reporting or filing requirements if your plan assets are below $250,000.
  6. We will handle all IRS plan administration.
  7. No transaction fees, asset valuation fees or plan termination fee.
  8. Invest in assets, like real estate, simply by writing a check or wiring funds from your Solo 401(k) bank account.

Advantages of the Solo 401(k) with Checkbook Control

  • Receive a customized IRS approved open architecture Self-Directed solo 401(k) plan.
  • As trustee of the plan, making an investment is as easy as writing a check or performing a wire transfer.
  • Generate tax-deferred or tax-free income or gains on your plan investments.
  • Open your self-directed Solo 401(k) plan at any local bank – no need for a special IRA custodian.
  • Receive strong asset & creditor protection.
  • Purchase real estate with leverage without triggering tax.
  • Receive an IRS opinion letter confirming the legality of the plan.

Using an LLC to Buy Real Estate with a Solo 401(k)

You don’t need an LLC (limited liability company) to buy real estate with your Solo 401(k). The plan itself can take title of the property, or in other words, own the property.

Purchasing real estate under an LLC provides asset protection, but there is no requirement to establish an LLC with your Solo 401(k) Plan funds. If you choose to establish an LLC, the Solo 401(k) will own the LLC, and the LLC will own the property. Much like a Self-Directed IRA structure, you will be the manager of the LLC. As manager, you have full control over your real estate investments.

How to Main Real Estate Property

One of the primary advantages of purchasing real estate with retirement funds is that all gains are tax-deferred until a distribution or tax-free in the case of a Roth account. Aside from navigating the IRS prohibited transaction rules, the following are a handful of helpful tips for making real estate investments using retirement funds.

  • The deposit and purchase price for the real estate property should be paid using retirement account funds and not from any disqualified person.
  • All expenses, repairs, taxes incurred in connection with the retirement account real estate investment should be paid using retirement funds – no personal funds from any disqualified person should be used.
  • If additional funds are required for improvements or other matters involving the retirement account owned real estate investment, all funds should come from the retirement account or from a non “disqualified person”.
  • Partnering with yourself or another disqualified person in connection with a retirement account investment could trigger the IRS prohibited transaction rules.
  • If financing is needed for a real estate transaction, only nonrecourse financing should be used. A nonrecourse loan is a loan that is not personally guaranteed by the retirement account holder or any disqualified person and whereby the lender’s only recourse is against the property and not against the borrower.
  • No services should be performed by the retirement account holder or any “disqualified person” in connection with the real estate investment.
  • Title of the real estate purchased should be in the name of the retirement account. For example, if Joe Smith established a Self-Directed IRA LLC and named the LLC XYZ, LLC, title to the real estate purchased by Joe’s Self-Directed IRA LLC would be as follows: XYZ LLC. Whereas, if Joe Smith established a Self-Directed IRA with ABC IRA Trust Company (custodian), and the custodian purchased the real estate directly on behalf of Joe without the use of an LLC, the title would read: ABC IRA Trust Company FBO John Doe IRA.
  • Keep good records of income and expenses generated by the retirement account owned real estate investment.
  • All income, gains or losses from the retirement account real estate investment should be allocated to the retirement account owner of the investment
  • Make sure you perform adequate diligence on the property you will be purchasing especially if it is in a state you do not live in.
  • Beware of fraud if purchasing real estate from a promoter.

The list of helpful tips outlined above should provide retirement account investors who are looking to buy real estate with a guideline of how to keep their retirement account from running afoul of the IRS rules.

Why invest in Real Estate?

After the 2008 financial crisis, investors became wary of Wall Street. They no longer felt comfortable making traditional investments they didn’t fully understand. Individuals, particularly those in the middle class, didn’t know what took place in Wall Street. Therefore, they were skeptical about using retirement funds to invest in traditional assets.

Real estate, however, is something most us feel comfortable with – lower class, middle class and upper class alike. Additionally, it helps investors diversify their retirement account, particularly if most of their investments are in equities, mutual funds, etc.

Many people worry about inflation, which is another reason they turn to real estate investments. Even if the risk of inflation isn’t real, it can seriously hurt a retirement portfolio. The value of currency today may be worth significantly less tomorrow. Hard assets are a way to protect your retirement plan against inflation. Hard assets act as a buffer against your retirement assets and the havocs of inflation.

Types of Real Estate Investments with a Solo 401(k)

Below is a partial list of domestic or foreign real estate-related investments that you can make with a Solo 401(k):

We wrote the book on the Solo 401(k)

A simple, yet informative handbook, Going Solo: America’s Best-Kept Retirement Secret for the Self-Employed was written to help small business owners and self-employed individuals discover the many advantages of establishing a Solo 401(k) Plan.

In an effort to eliminate the complexity of how one can establish an individual 401(k) plan, Adam Bergman wrote Solo 401(k) in a Nutshell. The book “…simplifies the process (of establishing a Solo 401(k) while…providing everything one needs to maximize their retirement assets” and gain financial freedom.

Learn more about the books →

Get in Touch

You want to self-direct your 401(k)! Call us at 800-472-1043 or fill out the form and we can help you.