Construction of a Spec. House Using Solo 401k Funds

QUESTIONS:

My goal - to construct a home to sell as a joint venture with my son in law while avoiding

prohibited transaction and any UBIT tax.

Scenario 1---- Form LLC making my solo 401k and son in law owners of 48% each. The other 4%

would be owned by Sam (a state registered general contractor who will do the construction).

My 401k and son in law will fund the entire project.....Jason will not contribute. His equity

position is earned by his construction. We would take title as TIC --48% ,48%, & 4%.

Sam is a completely unrelated party and not disqualified.

There is no way to accomplish new construction w/out input from the owner . Decisions ,as to selections that must be made and are not included in the home specifications must be made as construction proceeds.

Such items as :colors,flooring, cabinetry, lighting,appliances,carpeting,etc. to name a few. Everything that I read

says that you do have a right to Manage your investment (what is considered too much " hands on "Management) ??

Scenario 2----- Should the 401k owned LLC include only the 401k and have son in law and Jason

separately ,outside of the LLC??

No UBITS I presume ??

Do I need an Operating Agreement with this scenario ?? 

ANSWERS:

Whether scenario 1 or 2 in order for Sam to receive a profit from the investment he is going to have to invest funds in the project--in this case 4%. He would then receive 4% of the gains. This rule applies because your 401k funds are also involved in the investment, and the IRS will see it as the 401k not fully benefiting from its investment if Sam gets a profit even though he did not invest the initial 4%.

However, Sam could get compensated for work he does on the property from funds in the LLC if you go that route, of if you go the TIC route from funds in the 401k and by funds from the other investors.

UBIT would not apply if the property will be rented out. 

As previously discussed, neither you nor your son in law can perform sweat equity on the property, but you can perform managerial services (e.g., arrange for contractors and pay contractors).

If you decide to do this deal inside an LLC, see the following. https://www.mysolo401k.net/tenancy-in-common-tic-vs-llc-real-estate-purchase-using-solo-401k-funds/

For more information on the solo 401k regulations, VISIT HERE.