Individual 401K - Buy/Sell Land - Conflicting Info

10 Replies

I have an existing 401K that I am considering rolling into a solo-401K for single-member LLC side business I have. The brokerage it is with tells me that I am not allowed to invest directly into real estate or notes - however, third party providers of solo-401K set-ups are telling me that if I set up this with them, I will be given a free brokerage account (with this same company) with ability (via checkbook) to invest in real estate, notes, liens, stocks, etc. Which is correct? Also, if I use that to buy/sell land in less than year increments, my understanding is that since such transactions are treated as ordinary income, then it is earned income and can be placed back into the 401K. Sound right?

@Jim Froehlich

You can buy land in your 401k. Your brokers don’t learn that and don’t want you to buy land because they won’t make any money off your account. There is a lot of books and information on this subject. I would ditch the peeps that said you can’t do it because they are not knowledgeable or are liars.

Follow the rules- work with your administrator and CPA to answer your questions. 

What you are calling “Earned income” may be taxable in the 401k but if done properly may also be tax free or tax deferred. Learn the difference. It worth the time to learn the strategies. 

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@Jim Froehlich

The "free" Solo 401k plans offered by brokerage firms will not allow you to invest in alternative investments such as real estate, notes, etc. What you can invest in depends on what the plan documents allow - the plan documents of one plan provider don't allow for investing in real estate (i.e. the brokerage) vs the plan documents of the other Solo 401k plan provider do allow for such investments.

If you invest your Solo 401k funds in real estate all of the returns of such investment must flow back to the Solo 401k and will do so on a tax-deferred basis - this is not earned income which you would report on your personal taxes and then defer part to a 401k.

Please see the following additional considerations regarding setting up a Solo 401k to invest in real estate.

1. First, you must meet the eligibility requirements to set up a Solo 401k: (i) you are self-employed; and (ii) you do not have any full-time w-2 employees (i.e. working 1000 hours or more per year) working for your self-employed business or otherwise working for you. Given this understanding, you would be eligible to establish a self-directed Solo 401k which allows for investing in real estate.

2. If you are self-employed with no full-time employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. All of the income and expenses will need to flow in and out of the retirement account.

4. If you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link:

5. You can't live on the property or otherwise use it for personal use.

6. You can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. You must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. You should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job). 

@Jim Froehlich

The person you spoke with at your brokerage who said "you can't invest directly into real estate or note" with your Solo 401k is incorrect. That might be true if you set up Solo 401k with this brokerage and they place such restriction in their plan documents. But you can set up truly self-directed Solo 401K plan, which does not have investment restrictions. You simply have to follow IRS rules, and according to the IRS rules you can certainly invest in real estate, notes and any other alternative investments as long as the plan documents allow that and you don't violate IRS restrictions. Here is a direct link to the IRS website for your reference:

@Jim Froehlich

You certainly can invest into real estate and other alternative assets with a Solo 401k plan, just not a plan setup by the brokerages. A brokerage plan document will restrict you to investments offered by that broker. A Solo 401k plan setup by a specialty firm such as the ones who have representatives responding to your question here will typically allow for investment into any asset class.

You can also open an account for these Solo 401k plans at the very brokerages that setup the more restrictive plans. The difference here is that your underlying plan document from the specialty provider will allow you to make the alternative investments you want while also having access to brokerage products (without being restricted to them).

I'd recommend reaching out to a few providers to see what your options are and how the various offerings stack up.

If you purchased the land for cash and sold it on terms inside of the solo 401k would that trigger UBTI?  Also I understand that UDIF is not a concern with this type of plan, right?

@Rick Grimsley

If you start flipping land in your retirement account this may be considered an active trade or business. Per IRS all income from active trade or business would be subject to UBIT. 

What do you mean "resell land on terms"? If you mean owner finance - yes, you can sell the property and carry the note. In this case interest income would be considered passive income and sheltered from taxes.

You are correct, UDFI would not be a concern in the 401k, however it won't apply in your case. That would apply if you purchase property using leverage, inside of an IRA.

@Rick Grimsley

The trigger for UBIT would be regular and ongoing flipping (or other active business activities) within the 401k. One flip within the plan likely would not trigger UBIT, but the likelihood of UBIT increases with more flipping activity. Selling properties on terms does not trigger UBIT on its own and might actually reduce the likelihood of UBIT if it means properties are owned by the 401k for longer than if they were sold for cash.