Hello Bigger Pockets Friends! Looking for guidance on two questions related to single family detached rentals. 1.) If I sell a rental that I acquired using 100% qualified retirement money from a Solo 401(k) and immediately deposit the proceeds back into the Solo 401(k) would I have to do a 1031 exchange purchase or purchases to avoid capital gains or is this treated differently within a Solo 401(k) retirement fund/plan? 2.) Can the rental incomes from Solo 401(k) funded properties that flow directly back into the Solo 401(k) every month be treated as qualified contributions for tax purposes each year?
When a Solo 401(k) owns real estate, the income produced must flow back into the plan. The income is tax-deferred, just like income from dividends on a stock investment made with a 401(K). There is no need to do anything special like a 1031 exchange to defer the taxes. Earnings are simply earnings derived from plan capital, and do not count as contributions to the plan. Contributions are when you personally take income from your employment and set that aside into the plan.
Hi @Michael Gust ,
The sale of any assets held inside of an Individual 401(k) Plan are already tax-deferred (or tax-free if a Roth) so there is no need to structure a 1031 Exchange. The only time that you might consider structuring a 1031 Exchange on the sale of an asset held inside of a retirement account would be to avoid UBIT or UDFI taxes.
Earnings, profits, gains from assets held inside of a retirement account are just that. They are not contributions to the plan, but profits made on the investments that you made inside of the plan.
Hey Michael! I will confirm what others have pointed out.
1. The tax advantages of the 401k apply to the assets that are sold within the plan. As a result, there is no need to use other strategies such as a 1031 exchange to defer taxes on the sale of a rental property that was owned by the Solo 401k.
2. When the Solo 401k owns a property, the rental income that is paid to the Solo 401k does not count toward your Solo 401k contribution limits. The rental income is considered earnings or growth within the plan. Unlike with contributions, there is no limit on the amount of earnings you can have in the plan. If you have earned income from the plan's adopting employer, you can still make contributions to the plan regardless of the amount of earnings that any plan assets may have generated.
Thank you sincerely Brian, Bill and Justin! Exactly the answers I was seeking! Best regards, Michael