Anyone using a solo 401k for purchasing properties

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Anyone using a solo 401k for purchasing properties

Rona Faison
Irving, TX · Member since 2016 · 6 posts · 2 votes
Hello, I have a solo 401k that I have not done much with but thought about using it to purchase buy and hold rental properties. I'm interested primarily in multi unit properties duplex to fourplex and would be looking to carry mortgages on any properties purchased. Any experience with this out there? Success stories? Horror stories? All welcome I'm just trying to get a better understanding of this beyond what I've read in books. Or if you know of any good CPA's in or around Dallas Texas knowledgeable about this topic would be great info as well. Thanks!
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Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
9y

@Rona Faison , an alternative to purchasing the properties could be lending with your Solo 401(k) to others. This is what I do with my Solo 401(k). 

The way I do it, is I know a guy who is brilliant with real estate. He brings me deals, I read over what he's proposing, but really, I'm lending to the person more so than the deal. He's about as no-risk as you can get. You want to be super careful if you go this route, as this is still coming from your retirement account. Don't do second position loans, and don't lend to people who give you a bad feeling. 

I am NOT looking for borrowers. Please do not send me a note asking if I have any money. I only lend to people I know and this is not a solicitation.

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  • Ryan Wright
    Investor · Pensacola, FL · Member since 2016 · 17 posts · 4 votes
    9y

    No partner. I financed the rest from my own liquidity. I appreciate the help! I'm a novice. 

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y

    @Ryan Wright,

    it appears that you entered into a "Prohibited Transaction". Your 401k is not allowed to enter into any transaction with disqualified person. Here is the link to the IRS website explaining the rules:

    https://www.irs.gov/retirement-plans/plan-particip...

    0Reply
  • Ryan Wright
    Investor · Pensacola, FL · Member since 2016 · 17 posts · 4 votes
    9y

    How do I rectify?

    0Reply
  • Justin WindhamPro Member
    Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
    9y

    @Ryan Wright

    Since you are a disqualified person with respect to your 401k plan, it's possible that combining your own funds and your 401k funds in this investment would have created a problem.

    You might want to talk with your provider about the limited flexibility you'll have with the investment and the possibility of an "enabling" prohibited transaction.

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y

    @Ryan Wright, the good news is that unlike with self-directed IRA with the Solo 401k plan you are allowed to correct a prohibited transaction, which means that you have to undo the transaction to the extent possible and in any case to make good to the plan or affected account any loss resulting in the transaction, by restoring to the plan or affected account any profits made through the use of the plan assets. The plan must be placed in a financial position no worse than if the disqualified person had acted under the highest fiduciary standards (IRC Sec. 4975(f)(5) and ERISA Sec. 502(i)).

    0Reply
  • Michael Pulka
    Morrisville, PA · Member since 2016 · 13 posts · 1 vote
    9y

    Ok.  Back to the topic.  I think leveraging would become complicated in my case.  So maybe it may be best to accomplish my goal in two distinct steps in order to avoid the restrictions/complexities of the the prohibited transaction rules, and remain somewhat conservative in my approach. 

    What if:  I purchase the land with my solo 401k.   Then later refinance with a loan and effectively buy the land back from the loan and then build with structure with same loan.  What would be the consequences in this case with respect to the prohibited transaction rules as I would be buying back from myself in the end?

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y

    @Michael Pulka, you are disqualified person, you can not buy the land from your 401k, that would be considered prohibited transaction. IRS rules prohibited any transaction between qualified plan and disqualified person, buying is a transaction. Won't work.

    0Reply
  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    9y

    To learn more about the prohibited transaction rules see the following. 

    https://www.irs.gov/retirement-plans/retirement-plan-investments-faqs

    https://www.irs.gov/irm/part4/irm_04-072-011.html

    https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions

    0Reply
  • Michael Pulka
    Morrisville, PA · Member since 2016 · 13 posts · 1 vote
    9y

    Ok.  So this concept would work in a buy in hold for a rental situation, as long as the renter is not a disqualified person in a qualified plan.  But according to the IRS regulations - I could not use this qualified plan or assets to my personal benefit...  Am I getting it now?

    Is this what @Bernard Reisz was getting at  previously ...not technically sound ... make peace with prohibited transactions?

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y

    @Michael Pulka, yes you are getting it now. According to the IRS rules retirement accounts are not designed for you to benefit from now, but in the future during retirement. Until then treat is as if you are managing someone else's funds. 

    0Reply
  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    9y

    @Michael Pulka

    Correct as investing a retirement account in real estate is just another investment option.

    0Reply
  • Michael Pulka
    Morrisville, PA · Member since 2016 · 13 posts · 1 vote
    9y

    I was overthinking it.  I got it now.  So that is why when leveraging one must secure a loan that is guaranteed by the lender because the "disqualified person" (me) cannot guarantee the loan, correct?

    0Reply
  • Jay Jasunas
    Investor · Littleton, CO · Member since 2017 · 66 posts · 39 votes
    9y

    @Michael Pulka

    Yes Michael you have it correct now with regard to only being allowed to use a non-recourse loan to buy property with your solo 401k.

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y

    Michael, 

    Non-recourse doesn't mean the lender guaranteeing the loan. What it means is that the lender has no recourse expect underlying property itself. 

    0Reply
  • Janna Ascasio
    Riverside, CA · Member since 2017 · 8 posts · 16 votes
    9y

    If your retirement funds are not with your current employer, you can withdraw your money penalty-free and taxes differed, your money can be drawn upon and placed in a custodial account designed for investments. This allows your retirement fund to grow, and any capital gains from real estate transactions go through your 401(k)

    In order to qualify for 401 (k) financing, a borrower must not hold any professional position with the 401(k) provider. Clients working at a different company, self-employed, and retired individuals can access this program. 

    This is not a loan, this is not a distribution. 

    It could be 401k, IRA, 403b, 457, SEP, Pension Plans, Thrift Savings Plan, (TSP - Military), Annuities, KEOGHS

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y

    @Janna Ascasio

    Can you please clarify for me (and other readers) what is it that you are proposing here? I am not sure I completely follow you... You say funds can be withdrawn from a retirement account tax-free and penalties-free, are you talking about Qualified Rollover into another retirement plan or what? And if so - what type of plan are you talking about?

    0Reply
  • Janna Ascasio
    Riverside, CA · Member since 2017 · 8 posts · 16 votes
    9y

    Dmitriy, this program is based on 4 steps

    1. Form Corporation

    2. Corporation sponsors a 401 (k) plan

    3. Rollover old 401k plan to a new 401 (k) plan

    4. New 401 (k) plan invests in the corporation

    Corporation uses funds for a business, the process takes typically 3- 4 weeks

    Roth IRA and Inherited IRA is not qualified under this program

    Has to be near $50,000 or more in those accounts.

    I hope it helps

    0Reply
  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    9y

    @Michael Pulka

    It sounds like you are describing the rollover business startup 401k plan (ROBS).

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y

    I agree with George, looks like ROBS.

    Unfortunately it is not for everyone and is not relevant to for this discussion. Rona has existing Solo 401k plan and simply looking for best way to invest her funds. 

    0Reply
  • Michael Pulka
    Morrisville, PA · Member since 2016 · 13 posts · 1 vote
    9y

    So now that I've got the function of the self directed fund and it's application to a RE investment figured out I've got a few follow on questions as I think through the scenario.

    If I were to purchase a single family home using this self directed fund (solo 401k in this example).  I would likely use it as a rental and thus all capital gains would roll back into the 401k.  How would I go about setting up a slush fund for accessing funds to pay for repairs/upgrades or simply bills in order to upkeep/run the property?  Would this work as I am a disqualified person?

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y

    Michael, your 401k owns the property, all income from the property belong to the 401k and all expenses related to this property must be paid from the 401k.

    0Reply
  • Michael Pulka
    Morrisville, PA · Member since 2016 · 13 posts · 1 vote
    9y

    Is there a penalty when withdrawing funds from the 401k to pay for expenses related to the operation of the property? What is the typical process for making routine withdrawals?

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y

    You don't withdraw from the 401k when you pay expenses directly related to the investment own by the 401k, it is an expense of the 401k and not considered withdrawal or distribution. 

    0Reply
  • Michael Pulka
    Morrisville, PA · Member since 2016 · 13 posts · 1 vote
    9y

    Oh.  That makes sense.  Where can I read more about this? Is there anything out there that describes the ins-and-outs of this?

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y

    Michael, send me a private message and I'll share the resource with you. 

    0Reply
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