I'm looking to partially fund a fix and flip using money from a self-directed solo 401k. My thought is to purchase the property using hard money and then fund the rehab, which exceeds the purchase price and current value, using the solo 401k.
1. If I used personal funds to make the down payment and pay closing costs, would it then become a prohibited transaction because of commingling? Would I have to use funds from the 401k to fund the down payment and closing costs as well? Could I use private money to cover those costs? Could I use funds from my corporation?
2. Since the hard money lender will require me to personally guarantee the loan, will that make it a prohibited transaction? Or do I only have to offer the solo 401k loan as non-recourse?
3. Can the property still act as collateral to the non-recourse 401k loan if the hard money lender holds a first lien position?
4. If it is possible, how would I structure the deal? How is title held?
5. Although it would not be possible given the circumstance of this transaction, would a better partnership be to fund the purchase completely with the solo 401k and fund the rehab, either in total or in part, with hard or private money?
6. As a licensed agent would I be prohibited from acting as the agent on either the purchase or the final sale of the property? Would that make it a prohibited transaction because I "personally benefit?" What if I handled the transaction but didn't accept a commission?
It doesn't appear from your description that what you wish to do will be doable in order for you to be in compliance with the IRA.
You can do the transaction personally, but can't get your 401k involved. The only way for you to pull some of the 401k funds into the deal is by taking personal loan from the 401k, which as you know is limited to $50K or 50% of the balance, whichever is less.
Using 401k funds in your personal deal would be considered prohibited transaction.
You can do this deal in your Solo 401k, but you must not provide personal guarantee, that is not allowed. The property must be the only security for the loan. If you did so - you must not be personally involved in this deal, you can't contribute personal or your corporation funds for the rehab, etc. Also keep in mind that flipping is considered an active business, and as a result any profits you will make from the flip inside of your 401k will subject your 401k to UBIT.
If you did this deal in your 401k you would not be allowed to be an agent in this transaction. That is considered providing services to your 401k and is prohibited, regardless if you get paid or not.
You must remember that you personally (and your immediate family members) are considered to be "disqualified person" to your 401k. According to the IRS rules all transactions involving your 401k must be "arms length" - meaning that disqualified person must not be part of the transaction.
I thin @Dmitriy Fomichenko is on the right track of how things would need to work.
We have done a similar deal with a Private Lender (a friend, not a full time professional) Our Solo401K bought the property with 'cash', and the 'fix up' funds were essentially a first position loan on that property, but that loan was to the SOLO401K, NOT to us (there are 3 partners, all SOLO401Ks) and there was no personal gaurantees and no other 'recourse'. The Private Lender was comfortable with this as his loan as less that 50% LTV and he knows our past history and performance.
Admittedly, it would most likely be hard to find that same type of lender for most people, but a possibility.
I hope I explained that right.
As you may be learning from the responses, it's usually best to keep retirement investments separate from personal funds because of the prohibited transaction rules. Even in the relatively few instances where you could partner with your retirement funds, the reduced flexibility and increased risk of a PT may not be worth it.
While co-investing alongside one's solo 401k is not prohibited if the TIC rules are followed, utilizing financing under a TIC transaction would run afoul with the prohibited transaction rules.
I appreciate the responses. So in this situation I would have to reverse the roles? The solo 401k would purchase the property and the hard money lender would fund the rehab? Let's also assume that the down payment was covered by a non-disqualified private money lender and I had no personal funds involved. It seems as though that is what Daniel did, with the difference being he used a private lender rather than hard money.
Does the personal guarantee that the hard money lender would require on THEIR funds somehow violate the terms?
When you finance the property, the 401k would come up with the down-payment, the lender will provide the loan for the balance of the purchase price.
It doesn't matter how the lender is (private lender, a broker, bank, financial institution, etc.) - the loan to the 401k must be "non-recourse", meaning that you do not provide personal guarantee, the property is the only security for the loan. I think you might be misunderstanding hard money loans, many of them will not require personal guarantee and can be non-recourse. That's why it's called "hard money" because it is "asset-based" loan.
Your updated plan with the roles reversed sounds better. The main thing to watch out for with any financing to the 401k is that you are not personally guaranteeing the loan. If all of the funds needed for the project come from non-disqualified persons (regardless of the lender type) and loans are made only to the 401k without your personal involvement, then you're on the right track.