Buying Rental with Solo 401K money

Tax, SDIRAs & Cost Segregation
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Buying Rental with Solo 401K money

Ralph E Freeman
Phoenix, AZ · Member since 2020 · 2 posts · 0 votes

I would like to purchase a rental property with the funds that I've already rolled into a self directed retirement account at Solera Bank.

What happens after I've paid for the property using my funds at Solera Bank, taken possession, found tenants, and started collecting rent? What forms or filings are needed each year at tax time to establish whether my investment has grown, or decreased in value (hopefully NOT the latter)

Lets say I deposit all the rent back into the Solera Bank account and and use that same account to pay for all the property maintenance expense. I assume the funds (profit) I've accumulated by years end would be the amount my investment has grown, assuming the market value of the property has remained constant. Does this sound about right? Or what if the property value has actually increased AND I've got rental income (profit after expenses) 

How would these two different types of growth be documented? 

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John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
6y

If your Solo 401k buys the property it owns it not you. All the income and expenses are paid/received by your 401k. 

My understanding is that you don't have to do any reporting until assets are 250k or more.

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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    6y

    If your Solo 401k buys the property it owns it not you. All the income and expenses are paid/received by your 401k. 

    My understanding is that you don't have to do any reporting until assets are 250k or more.

    1Reply
  • Bob ReinhardBusiness Member
    Lender · Patterson, NY · Member since 2017 · 488 posts · 186 votes
    6y

    @John Underwood

    With using a self-directed IRA, you cannot do any of the property management yourself. That is violet has of IRS regulations. In other words, you cannot pay yourself to do work, nor any entity in which you have an interest.

    Check on rents. I may recall, incorrectly, rents must be plowed back into the self-directed IRA and cannot go to you. Check with your IRA custodian.

    Much success!

    Bob

    [email protected]914-861-5501
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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @Ralph E Freeman

    If you have established a Solo 401(k) with a reputable provider, they should be able to assist you with all of these very basic operational questions.

    If you have obtained a set of 401(k) plan documents with no meaningful support, then you should engage a CPA or attorney who is familiar with IRS rules and the operation of a self-directed retirement plan.

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  • Bob ReinhardBusiness Member
    Lender · Patterson, NY · Member since 2017 · 488 posts · 186 votes
    6y

    @Ralph E Freeman

    See my response incorrectly posted in Reply @ John Underwood

    [email protected]914-861-5501
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  • Carl FischerPro Member
    Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
    6y

    Do the 401k tax return- irs form 5500. You don't have to file 5500 until it's FMV is $250,000 but when buying property it makes sense to because you can use losses to offset possible taxes. You also learn before you need to file always a good thing and you start the clock.

    [email protected]215-283-2868
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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    6y
    Originally posted by @Bob Reinhard:

    @John Underwood

    With using a self-directed IRA, you cannot do any of the property management yourself. That is violet has of IRS regulations. In other words, you cannot pay yourself to do work, nor any entity in which you have an interest.

    Check on rents. I may recall, incorrectly, rents must be plowed back into the self-directed IRA and cannot go to you. Check with your IRA custodian.

    Much success!

    Bob

    Correct you can not be paid to manage your properties.

    However you can ad the fiduciary pay bills and sign leased. You can't add sweat equity to a property.

    With a check book Ira Congress allows you to sign documents and checks for your IRA. You can't be paid for this.

    Rents should go directly back into the IRA.

    1Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    6y

    @Ralph E Freeman

    What happens in the 401k does not have any affect on your personal taxes. 

    401k has it's own filing requirements, specifically form 5500EZ. Simple two-page form, your plan provider can assist you with the completion of this. It is due by the end of 7th month following the end of the plan year, typically July of each year. 

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  • Ralph E Freeman
    OP
    Phoenix, AZ · Member since 2020 · 2 posts · 0 votes
    6y

    A BIG thank you to the respondents who reminded me about the annual 5500EZ filing requirements! That’s an important one... $250 per day fine for failure to file by July deadline!! 😬

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