401k owns LLC that invests in real estate?

Tax, Legal Issues, Contracts, Self-Directed IRA 21 Replies

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.

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/

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 | (805) 852‑7418 | http://www.realestategroup360.com

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 EA, Hamilton Tax and Accounting | [email protected] | (224) 381‑2660 | http://www.HamiltonTax.Net

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?

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 | (805) 852‑7418 | http://www.realestategroup360.com

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

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

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.

@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 | (805) 852‑7418 | http://www.realestategroup360.com

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.

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.

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.

No company avatar mediumJohn Thedford, John Thedford | 239‑200‑5600 | http://www.capehomebuyers.com | FL Agent # SL3098153

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.

@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.

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".

Medium newest with transparencyJacob Blackett, Holdfolio | [email protected] | 775‑762‑6884 | http://holdfolio.com

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. | http://www.barnardenterprises.com

@Brant Richardson If you participate in an employer's plan, you cannot self direct it. If you have your own Solo 401K, you become the trustee, therefore your 401K is automatically self-directable (GREAT WORD!).

The reason you would want an LLC inside your 401K is asset protection. You want to segregate any house you own from the rest of your retirement assets. I see that you live in California, which is a royal pain in the plan. Your profile also says that you're interested in investing out of state, which is fine. When you create your LLC, your 401K becomes the sole member and organizer. If you're creating this outside of California, you'll need a representative in the state in which you do organize it. This person gets the mailings, etc. You will become the manager of the LLC. If your LLC makes a profit and reports it, it will file a K1 naming your 401K as the recipient. 401Ks pay no income tax, and if you do things right, it will pay no UBIT as well.

If you don't want to jump through the LLC hoop, your 401K can own the house directly, but then all the assets of the 401K become accessible in the event of a law suit.

I buy duplexes inside my 401K which are held in an LLC owned by my 401K. They're highly leveraged and I carry a lot of liability insurance as well. This strategy isn't for everyone, but they're in my Roth 401K, so I never pay short term capital gains, long term capital gains, health care surcharges, UBIT or income tax ever!

Caveat: This is not for the feint of heart.