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401k owns LLC that invests in real estate?

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Brant Richardson

Santa Barbara, California

Oct 30 '13, 10:28 AM


I talked to a representative about making my 401k self directed to invest in real estate this morning. He said I can not invest directly in real estate with a sd401k but I can invest in an LLC with the sole purpose of owning real estate. This seems like it would defeat the purpose of tax deferred investing. The LLC would still have to pay income tax right? Only the profit that the 401k made from the LLC would not be taxed right?

I couldn't find this specifically with a search of the archives.



Dale G.

Wholesaler from Wauwatosa, Wisconsin

Oct 30 '13, 11:14 AM


I've heard of a self directed IRA but not a self directed 401K but I wouldn't say I'm well versed in either...this website has some information on the IRA path.

http://www.iraclub.org/



Bill G.

Real Estate Investor from Springfield, Missouri

Oct 30 '13, 11:18 AM


I had the same issue this am on a sd401, I'm not familiar with it either. @Steven Hamilton II may know how it is treated. :)



Ellis San Jose

Real Estate Investor from Westlake Village, California

Oct 30 '13, 11:22 AM


Perhaps you need a different 3rd party administrator. A self directed 401k depending on your plan documents you should not be forced to use an LLC to invest in real estate.

Call Quest IRA in Texas & ask an expert there, they have great customer service.

I would explore the wisdom of owning & having ownership & title to real estate in a 401k.



Medium_realgroup360-480x270Ellis San Jose, Real Estate Group 360-The Note Guys
Telephone: (805) 852-7418
Website: http://www.thenoteguys.com
E. San Jose www.thenoteguys.com www.realestategroup360.com


Steven Hamilton II Verified Moderator

Real Estate Investor from Lake Villa, Illinois

Oct 30 '13, 12:45 PM


Your SD 401k CAN invest in real estate directly. That is not a problem. You may want to consider becoming your own administrator.



Medium_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660


Brant Richardson

Santa Barbara, California

Oct 30 '13, 01:04 PM


The rep for my administrator said they used to allow directly buying real estate but the fees and paperwork became prohibitive and they now do not allow it any more.

As an employee do I have the right to choose an administrator or become my own administrator? Or is that up to the company I work for?



Ellis San Jose

Real Estate Investor from Westlake Village, California

Oct 30 '13, 01:55 PM


as an employee? This is not your own self directed plan. This is your employers 401k plan. They make the rules.



Medium_realgroup360-480x270Ellis San Jose, Real Estate Group 360-The Note Guys
Telephone: (805) 852-7418
Website: http://www.thenoteguys.com
E. San Jose www.thenoteguys.com www.realestategroup360.com


Brant Richardson

Santa Barbara, California

Oct 30 '13, 05:20 PM


Will an LLC owned entirely by my 401k plan have to pay income tax?



Ellis San Jose

Real Estate Investor from Westlake Village, California

Oct 30 '13, 07:28 PM


@Brant Richardson

If it is structured properly if will be tax defreered



Medium_realgroup360-480x270Ellis San Jose, Real Estate Group 360-The Note Guys
Telephone: (805) 852-7418
Website: http://www.thenoteguys.com
E. San Jose www.thenoteguys.com www.realestategroup360.com


Jeff S

Real Estate Lender from Los Angeles, California

Oct 30 '13, 10:00 PM


You have it backward, Brant. A self-directed 401k is sponsored by your company, not the other way around.

You could create an LLC (or any other type of entity) and set up an SD401k under it. Your business would pay a salary to you and your wife; the only permissible employees. Between you and your wife, the payroll and profit sharing contributions could total up to around $50k for each of you. These would be tax deferred, or tax free in the case of a Roth contribution to your SD401k.

Your 401k would have an account at a local bank and you, as the trustee would have checkbook control over it. As a trustee you could direct investments into any permissible investment, including real estate.

Note, that while you could roll over most other retirement assets into your SD401k plan, you can only make additional contributions if your business has a payroll.

Sorry if this is too top level. SD401k ‘s are a popular topic around here so you might do a search. You might also find another representative.

Jeff



Brant Richardson

Santa Barbara, California

Nov 01 '13, 10:36 AM


Thanks Jeff. I have a 401k with a company where I am employed. I am trying to figure out how I can use the money in that account as capital for real estate investment. The 401k administrator for the company I am employed with says that I am not allowed to buy real estate directly but I am allowed to buy an LLC that holds real estate. So I am trying to figure out how to do that and still keep all the rental profits as deferred.

Are you saying I should make an LLC, buy real estate, buy the LLC with my 401k, then create a 401k within my LLC and stick the profits in it. Like a 401k within a 401k.



Ellis San Jose

Real Estate Investor from Westlake Village, California

Nov 01 '13, 11:37 AM


@Brant Richardson

I believe most people here assumed incorrectly that you are self-employed & are creating your own solo 401k that is truly self directed.

Since you are an employee, you won't have as much flexibility with your employer as you would with your own plan. I imagine it may be problematic to work within their guidelines to do this easily. Your employers 401k plan document will dictate what is permissible.

If you create an LLC, the plan administrator may have to approve it before they allow you to invest in it. My guess it that they would probably balk at it.

Are you able to borrow from your 401k? That might be an alternative for you. Of course consult with your CPA before you do this, there are tax ramifications if you don't pay it back within a certain time frame.



Medium_realgroup360-480x270Ellis San Jose, Real Estate Group 360-The Note Guys
Telephone: (805) 852-7418
Website: http://www.thenoteguys.com
E. San Jose www.thenoteguys.com www.realestategroup360.com


Brant Richardson

Santa Barbara, California

Nov 01 '13, 11:50 AM


Borrowing against my 401k is a good idea. At least my interest payments would go back into my own account. I was hoping to figure out a way to have my rental income be tax deferred.



Phil Glantz

Real Estate Investor from Pepperell, Massachusetts

Nov 05 '13, 09:46 AM


I've never heard of an employer 401(k) plan that allows participants to invest in private placements.

I can have a self-directed 401(k) and I can vest investments in different LLCs that the 401(k) trust establishes, for the convenience of the trustee (me). They are single-member LLCs, where the only member is the 401(k) trust. They are manager-managed, where I, as trustee, would appoint myself manager. Since the LLC is single-member, it is a disregarded entity by the IRS and therefore the income is either tax-free or tax-deferred depending on whether the LLC was funded with Roth 401(k) funds or tax-deferred 401(k) funds.

The big question I would have is who would manage the LLC. The administrator of the plan or yourself and whether you could be the LLC manager as just a plan participant. Most CPAs and many tax attorneys don't have enough knowledge to deal with these types of issues. I would seek advice from an attorney who knows a lot about ERISA plans.



John Thedford

Real Estate Investor from Naples, Florida

Nov 05 '13, 10:06 AM


I have a SD 401K and act as the administrator as Steven mentioned. I chose to do mortgages with the 401K and it has worked well. If you ask the tax specialists, many suggest owning RE outside of a retirement plan. When I first heard that I questioned it but now I realize that is the best plan (at least for myself). As a matter of fact, I just received about 10K in tax bills. If my RE was inside my 401K I could not write that off this year and it would reduce my 401K funds which I am trying to grow. So, you lose a lot of writeoffs with RE if it is inside your plan. You can own it outside and reap the tax benefits you would lose otherwise.



Brant Richardson

Santa Barbara, California

Nov 05 '13, 10:20 AM


I was thinking tax write offs wouldn't matter since it is in a tax deferred account anyway... but when it came time to start withdrawing from the account it would actually mattter.



Scott W.

Illinois

Nov 05 '13, 10:21 AM


@john thedford the write offs you receive are great, however, keep in mind you have to pay some of the write offs back if/when you sell the property (ie, the depreciation).

keep it a long time, and you will have a larger payback...of course, your rental investment should (hopefully) increase in appreciaton and prinicpal paydown.



Jacob Blackett

Indianapolis, Indiana

Nov 06 '13, 08:46 PM


Simply don't file a tax return for the LLC- it's owned by the tax exempt SD401k so you don't file. You're the manager of LLC. Same process as an IRA LLC or "check book IRA".



Will Barnard Verified Moderator Donor

Real Estate Investor from Santa Clarita, California

Nov 06 '13, 08:56 PM


Having a 401k plan with your employer is not self directable (just made up a new word). To use those funds, you have three options: 1. Die (not really an option) 2. Quit and roll into a self administered 401k plan (you need to have a business that makes money and has no employees other than you and a spouse) or 3. Utilize your borrowing provisions. Most 401k plans have them but you are limited up to 50% of your vested interest or up to $50k.

The good news on borrowing provisions is that the rates are low, you are paying your own 401k back with interest, and with a few tricks, you can get some tax write offs while doing it. For example, once you get the loan (make sure you get the 15 year option), record a deed of trust against your personal residence, that loan has just become a "mortgage loan" and any interest you pay back to the 401k (which ultimately is yourself) is tax deductible (at least now it is until they take that from us too).



Medium_be_logoWill Barnard, Barnard Enterprises, Inc.
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com - For all Southern California House Flippers, Agents, and Wholesalers


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