Solo 401k income as facilitator on FSBO?

Question

I'm selling one of our apartment buildings owned outside of our retirement accounts to another investor as a private sale with no RE agents or commissions involved. We own the building in a LLC, lets call this "LLC A" and it produces passive, taxable income to us. I have another "LLC B" that is set up with my solo 401K and has occasional earned income. I am the sole member of both LLCs.

I would like to defer some of the profit from the apartment sale to my solo 401k. I am a full time self employed investor and not a licensed RE agent, fyi. My thinking is to have LLC B charge a facilitation fee to LLC A and have the fee paid at closing from net distributions from the sale, then contribute that amount to my SoloK.

So 3 questions:

1. Would there be any issues from a compliance perspective doing this?

2. Can I pass through the full $24K (with catchup, I'm >59.5 yrs old) to the soloK?

3.Can I just draft an agreement between both LLCs to agree to the fee?

Any perspectives on this is appreciated @Dmitriy Fomichenko or @Bryan Hancock or others, thanks.

Bob

Bob Malecki · Answer

Correct, LLC B is not owned by my soloKm thanks.

Carl Fischer · Answer

So LlcB is paying you a salary W2 and from your w2 you are contributing to your 401k that LLCB sponsors and are getting a LLC B company match or company contribution into your 401k based on 401k rules? Do I have it correctly stated?

LLC B is not owned by your 401k? This is the issue I may have misunderstood. I am very conservative when it comes to the rules.

Bob Malecki · Answer

Hi @Carl Fischer my soloK is not getting paid by my LLC. My LLC A is paying LLC B then I, as the 'employee' of LLC B is doing a capital contribution to my SoloK. Does that make sense?

Carl Fischer · Answer

@Bob Malecki

I believe it is prohibited for your 401k to be paid by you or your LLC. You are a disqualified person.

George Blower · Answer

@Bob Malecki

Assuming you can have a Solo 401k (self-employed with no full-time employees), here is a framework of determining whether you can contribute this income to a Solo 401k:

1) The threshold issue is whether this income is earned self-employment income (e.g. reported on Schedule C in the case of single-member LLC that is taxed as a disregarded entity). You will need to verify this with your tax advisor.

2) If yes, you can contribute to a Solo 401k (subject to contribution rules and limits). Please note that if your goal is Roth contributions, you can contribute as much as $56K (or even $62k if you are 50 or older) if you have a Solo 401k plan which supports Mega Backdoor Roth contributions.

Bob Malecki · Answer

Thanks for the analysis @Brian Eastman. My thinking is that since I can put that $25K into an environment that will yield 20%-30% annualized ROI with tax free Roth characterization, I may as well take the tax hit for cap gains and SE tax now then grow that money tax free in the Roth soloK.

Brian Eastman · Answer

@Bob Malecki

If LLC B is simply the sponsor for the Solo 401(k), there is no plan compliance issue with this transaction.

I'd need to defer to your CPA on the concept of shifting capital gains in LLC A to services/self-employment income in LLC B. Could work, but I'm not sure paying an extra 15% in self-employment taxes on that money is beneficial to then put that money in the Solo 401(k).

Assuming a blessing from your CPA, the entire $25K available for you to contribute (the limits went up in 2019) would take closer to $28,000 in income. You will need to pay self-employment taxes on the income before making the contribution to the plan.

Solo 401k income as facilitator on FSBO?

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