Investor · UT · Member since 2023 · 14 posts · 2 votes
Hi all! I have property in an llc that I would like to put some short term rentals on. The llc owns 40 acres and I'd like to purchase 20 of that for some cabins I'd like to short term rent out. Looking for long term growth with tax advantages. Hence, the solo 401 roth angle. I know you cant purchase property from myself individually but this is in a llc with its own name and all. Is there a way to do this? If not how can I get this idea bringing cash into my solo 401k?
A Solo 401(k) does offer a participant loan provision, but it is capped at the lesser of $50K or 50% of the plan value. That probably would not help in this proposal. It also seemed clear to me the goal was to get income from the project tax sheltered into the Solo 401(k), not access the 401(k) for capital to accomplish the deal. The loan would only accomplish the latter.
The participant loan is typically at prime +1%, so not really the best investment for the plan, especially when you consider you are replacing the pre-tax dollars in the plan with post-tax dollars as you repay the loan.
The Solo 401(k) can be a legitimate tool to access a limited amount of cash to jump-start a personal enterprise. From the plan perspective it is usually a wash or slight negative outcome. You are typically better off investing the plan in something that earns better than prime +1% and letting the plan accumulate income tax-sheltered as it is designed to do.
There is absolutely no means to accomplish what you are looking to do. You are a disqualified person to your plan, and that disqualification extends to any entity you own or control. Any direct or indirect transactions between a plan and a disqualified person create severe tax consequences.
Your Solo 401(k) can invest in rental property, but must do so in a way that has zero intersection with you or your personal enterprises. The cost of the tax-sheltering afforded to the plan is that strict separation between the plan and your personal finances.
@Brian Eastman I know solo 401k and employer 401k's are different, but that's about the extent of my knowledge.
Is it possible to take out a loan against a solo 401k the same as you would with an employer type 401k, and use that loan to do the OP's cabin idea? The profits could be used to pay back the loan at whatever the appropriate interest rate is and it would be something similar to dumping more money in to the 401k.
I'm not sure if the OP's goal was to use existing funds to develop land or to grow the solo 401k. Using the Solo 401k to develop the land might be a burden if he planned to DIY anything. If I understand correctly, if the property was owned by the 401k, the OP could't legally develop or manage the property personally. With the idea of simply borrowing money against the plan, the cabins would then be under the ownership of the OP so it wouldn't fall under the solo 401k rules of separation.
A Solo 401(k) does offer a participant loan provision, but it is capped at the lesser of $50K or 50% of the plan value. That probably would not help in this proposal. It also seemed clear to me the goal was to get income from the project tax sheltered into the Solo 401(k), not access the 401(k) for capital to accomplish the deal. The loan would only accomplish the latter.
The participant loan is typically at prime +1%, so not really the best investment for the plan, especially when you consider you are replacing the pre-tax dollars in the plan with post-tax dollars as you repay the loan.
The Solo 401(k) can be a legitimate tool to access a limited amount of cash to jump-start a personal enterprise. From the plan perspective it is usually a wash or slight negative outcome. You are typically better off investing the plan in something that earns better than prime +1% and letting the plan accumulate income tax-sheltered as it is designed to do.