Would like to post this question and see if anyone has experience with this scenario of investing in Multi-family. Can a Deal Sponsor invest funds from his/her own syndication deal as two entities 1) a Solo 401k Trust and 2) an Individual LLC ? Are there any legal issues with this scenario?
Rental Property Investor · Baltimore, MD · Member since 2014 · 408 posts · 209 votes
5y
@Srikanth Katuru welcome to BP! While I think it's technically allowed (this is not legal or tax advice), it would be very difficult. You as an individual or an owner of any entity (or a number of related parties) CANNOT benefit at all from the ownership belonging to the 401k. So it would mean that any income/cashflow attributable to the 401k's ownership CANNOT go to you (or an entity owned by you, or one of the enumerated related parties or an entity owned by them) - e.g. acquisition fee, management fee, plumbing expenses if you do plumbing work, etc., but must go to an arm's length third party or stay within the confines of the 401k.
I would not recommend it.
But, it might also not be allowed anyway. I'm sure someone else who knows more will chime in and help out!
Rental Property Investor · Baltimore, MD · Member since 2014 · 408 posts · 209 votes
5y
@Srikanth Katuru welcome to BP! While I think it's technically allowed (this is not legal or tax advice), it would be very difficult. You as an individual or an owner of any entity (or a number of related parties) CANNOT benefit at all from the ownership belonging to the 401k. So it would mean that any income/cashflow attributable to the 401k's ownership CANNOT go to you (or an entity owned by you, or one of the enumerated related parties or an entity owned by them) - e.g. acquisition fee, management fee, plumbing expenses if you do plumbing work, etc., but must go to an arm's length third party or stay within the confines of the 401k.
I would not recommend it.
But, it might also not be allowed anyway. I'm sure someone else who knows more will chime in and help out!
Attorney · Austin, TX · Member since 2014 · 888 posts · 759 votes
5y
Check with your administrator/custodian. I've seen account holders partner with their retirement account on deals. One of the IRA custodians around here say in presentations that the holder and the account has to be on the same side of the transaction - both lenders or both borrowers, but not the holder getting money from the account.
You can certainly invest your own funds into your own deal. However, you absolutely CANNOT invest your Solo 401k funds into your own deal. By doing so you will receive indirect personal benefits from your 401k which is considered a "prohibited transaction".
Here is an easy way for you for the future to test if 401k transaction would be in line with IRS rules: make sure that transaction is "arms length" which means that there is no "disqualified person" involved. This is clearly not the case in your scenario!