Posted over 7 years ago

Empowering Real Estate Investors with the Solo 401k

Many of our clients are drawn to the investment capability of the Solo 401k.  The plan also offers additional advantages that are of particular advantage for real estate investing, such as direct access to funds, loan feature, and tax benefits.  The Solo 401k is the the perfect vehicle for real estate investments.

Unlimited investment capability

The Solo 401k can be invested in both traditional and non-traditional assets.  Many retirement plans only allow investments into traditional assets, such as stocks, bonds and mutual funds.  The Solo 401k can be invested into a wide range of assets, including real estate.  According to the Employee Retirement Income Security Act (ERISA) of 1974, it is fully permissible for the Solo 401k to be used for real estate investments.  

The Solo 401k can be invested into the following real estate types:

  • Residential properties
  • Commercial properties
  • Foreclosures
  • Single family homes
  • Apartments
  • Townhomes and condominiums
  • Mobile and manufactured homes
  • Raw land
  • Mortgage notes
  • Real estate purchase options
  • Tax deeds
  • Tax liens

The process of investing with the Solo 401k can look very similar to a personal purchase of real estate.  Once the plan is established, it is ready for investing in real estate.  A property is first identified and researched with due diligence.  Instead of purchasing the property in the name of the buyer, the purchase must be made with Solo 401k funds and in the name of the Solo 401k plan.  The title to the property along with all transaction documents must be in the name of the Solo 401k.  The participant is trustee of the plan, and as trustee, he or she signs all documents related to the purchase.  All expenses must be paid for by the Solo 401k account.  All income and gains must be returned to the account.

If the Solo 401k account does not have sufficient funding for the purchase, there are two possible options.  First, the property can be purchased in partnership with a non-disqualified person.  The percentage of interest for each partner must be determined, and all transactions must be in accordance with the percentage of ownership.  The Solo 401k purchases an interest in the property, and the investment is made directly into the property.   All expenses, income and gains must be divided among the partners according to the percentage of ownership.  For example, if the Solo 401k purchases a 50% interest in the property, then the Solo 401k must pay for 50% of the expenses and will receive 50% of the income from the property.

A second option involves obtaining financing for the purchase.  The Solo 401k can only be used in conjunction with a non-recourse loan.  A recourse loan, which is the most widely available type of financing, is considered a prohibited transaction when used with the Solo 401k. 

Direct access to funds

Investments using the Solo 401k do not require custodian consent.  The participant is trustee of the account, and he or she can make decisions regarding the usage of the account.  The Solo 401k eliminates the fees and delays associated with obtaining custodian consent.  The participant can make decisions and act on them quickly.  This is of particular advantage with real estate investments, where time is of the essence. 

Tax benefits

Using the Solo 401k to invest in real estate gives several tax benefits.  The plan enables tax-free or tax-deferred gains and income.  All profits return to the Solo 401k account to continue growing while being sheltered from taxes.  Income and gains from the investment produce tax-deferred profits.

Loan feature

The Solo 401k has a loan feature which allows the participant to borrow from the account at any time and for any purpose.  The loan can be made for up to 50% of the account or $50,000, whichever is less.  The Solo 401k loan can be for any purpose, such as renovations, upgrades, and other real estate investment expenses.

The Solo 401k retirement plan offers many advantages, making it the perfect vehicle for real estate investments.  Its unlimited investment capability, direct access to funds, loan feature, and tax benefits give real estate investors the power and freedom to do what they do best- invest in real estate. 

The features of the Solo 401k give real estate investors the advantage in real estate investing.  The unlimited investment capability of the plan, along with its direct access to funds, tax benefits, and loan feature empower real estate investors to do what they do best.