Flipping with a Solo401K Trust

7 Replies

I'm an active investor rehabbing and flipping 10 or more homes a year. So this is my primary " bread and butter."  Can I flip one or two homes through a Solo401k when partnering with a qualified person ? 

@Jorge Rodriguez

A Solo 401k can flip houses, so long as you remain at arm's length to the transaction.  In all likelihood, flipping 1-2 homes per year with such a plan, considering that you are also personally flipping so many homes would expose the gains on those flips to UBIT taxation.  The IRS looks at the entire picture of activities to determine whether the plan meets the threshold of engaging in a trade or business on a regular or repeated basis that create such exposure.

Acting as a hard money lender on flip transactions would not expose the plan to UBIT, but could result in lesser returns even than going ahead and flipping and paying UBIT - it all depends on the quality of the deals.

The ROBS plan does "avoid UBIT", but is an entirely different type of structure for a different purpose.  Gains are still taxed, just at a lower corporate rate than the trust rates that apply to UBIT.

The right approach in your situation will depend very much on what you goals are. 

Originally posted by @Jorge Rodriguez:

I'm an active investor rehabbing and flipping 10 or more homes a year. So this is my primary " bread and butter."  Can I flip one or two homes through a Solo401k when partnering with a qualified person ? 

 If don't correctly, i'd recommend lending on the transaction than flipping it yourself. Keep in mind you cannot do the work yourself. There are a great deal of things to consider on these.

Originally posted by @Brian Eastman :

@Jorge Rodriguez

A Solo 401k can flip houses, so long as you remain at arm's length to the transaction.  In all likelihood, flipping 1-2 homes per year with such a plan, considering that you are also personally flipping so many homes would expose the gains on those flips to UBIT taxation.  The IRS looks at the entire picture of activities to determine whether the plan meets the threshold of engaging in a trade or business on a regular or repeated basis that create such exposure.

Acting as a hard money lender on flip transactions would not expose the plan to UBIT, but could result in lesser returns even than going ahead and flipping and paying UBIT - it all depends on the quality of the deals.

The ROBS plan does "avoid UBIT", but is an entirely different type of structure for a different purpose.  Gains are still taxed, just at a lower corporate rate than the trust rates that apply to UBIT.

The right approach in your situation will depend very much on what you goals are. 

 How much is the UBIT taxation? 

Originally posted by @Brian Eastman :

@Jorge Rodriguez

The right approach in your situation will depend very much on what you goals are. 

My goals are to make a 18k employee deferral every year ( taxed up front and no taxes when withdrawing at age 59 1/2. Also I'd like to grow the money for retirement.

Having done one flip deal and paying UBTI taxes will that disqualify the whole SOLO 401k plan?  Or can I keep the existing SOLO401k Plan and invest in unrelated investments?

@Jorge,

The Rollover as Business Startup would likely be more than you are looking for, as it involves a C-Corporation and Profit Sharing plan combination.

Making a new contribution to the Roth portion of a 401k each year comes from income you earn in the business that is sponsoring the Solo 401k - which is your after-tax real estate flipping activity.

As you build the 401k plan, it can invest in many ways associated with real estate.

Flipping houses does not disqualify a retirement plan, it is just a type of activity that comes with a tax burden since the tax-exempt entity is competing with taxpaying businesses.  Business type activities such as flipping are taxed within the plan, but the after-tax income still goes to the plan.  Any passive activities with the plan are not taxed in this manner: Rental income, interest on loans, traditional stocks, etc.