Real Estate Investing with a Solo 401(k)

Of course, you don’t need an LLC for your Self-Directed 401(k) to buy real estate. The Solo 401(k) itself can take title of the property. In other words, the plan can own the property.
There is no requirement to establish an LLC with your Solo 401(k). However, buying real estate under an LLC provides asset protection. Solo 401(k) owns the LLC, and the LLC will own the property and you’re the manager of the LLC. As manager, you have full control over your investments. In fact, making a real estate investment with a Solo 401(k) LLC is as easy as writing a check!
Related: IRA Financials Relationship with Charles Schwab

There are multiple advantages to using a Solo 401(k) LLC to purchase real estate. Before discussing advantages, it is important to note that not all custodians allow this option. Furthermore, many charge transaction and asset valuation fees. If you are looking to establish a Solo 401(k) to purchase real estate, or other alternative investments, we recommend asking about transaction and asset valuation fees before selecting a Solo 401(k) provider. With that information in mind, using a Solo 401(k) LLC to invest in real estate has the following advantages:
* The Solo 401(k) LLC was created by the IRS specifically for the self-employed or small business owner with no full-time employees
* Receive a customized IRS approved open architecture self-directed solo 401(k) plan
* Gain the ability to make traditional investments, such as stocks, but also all IRS approved alternative asset investments, such as real estate.
*Help build your retirement nest egg by contributing up to $69,000 per year in 2024 ($76,500 if age 50 or older) – almost 10 times the maximum contribution amount of an IRA
*Contribute to your plan using pretax or Roth (after-tax) funds. Below, please find a link that discussed the benefits of using Roth funds to purchase real estate
*Borrow up to $50,000 tax- and penalty-free and use those funds for any purpose, whether personal or business using a Solo 401(k) loan.
*Invest in what you know and understand without tax, such as real estate, precious metals, tax liens, hard money loans, private businesses, and much more.
*As trustee of the plan, making an investment is as easy as writing a check or executing a wire transfer.
*Generate tax-deferred or tax-free income or gains on your plan investments
*Open your Self-Directed Solo 401(k) plan at Capital One Bank – no need for a special custodian
*Asset & creditor protection
*Purchase real estate with leverage without triggering tax
*Receive an IRS opinion letter confirming the legality of the plan

Aside from navigating the IRS prohibited transaction rules, the following are a handful of helpful tips for making real estate investments using a Solo 401(k):
*The deposit and purchase price for the real estate property should be paid using retirement account funds and not from any disqualified person
*All expenses, repairs, taxes incurred in connection with the retirement account real estate investment should be paid using retirement funds – no personal funds from any disqualified person should be used
*If additional funds are required for improvements or other matters involving the retirement account owned real estate investment, all funds should come from the retirement account or from a non “disqualified person”
*Partnering with yourself or another disqualified person in connection with a retirement account investment could trigger the IRS prohibited transaction rules.
*If financing is needed for a real estate transaction, only non-recourse financing should be used. A non-recourse loan is a loan that is not personally guaranteed by the retirement account holder or any disqualified person and whereby the lender’s only recourse is against the property and not against the borrower.
*No services should be performed by the retirement account holder or any “disqualified person” in connection with the real estate investment.
*Title of the real estate purchased should be in the name of the retirement account.
*Keep good records of income and expenses generated by the retirement account owned real estate investment. All income, gains or losses from the retirement account real estate investment should be allocated to the retirement account owner of the investment.
*Make sure you perform adequate diligence on the property you will be purchasing especially if it is in a state you do not live in.
*Beware of fraud if purchasing real estate from a promoter.

Real estate remains one of the most popular alternative asset investments made by our clients. We recommend the following tips for using your Solo 401(k) to invest in real estate:
*Be cognizant of the IRS prohibited transaction rules. The foundation of the prohibited transaction rules is based on the premise that investments involving IRA and related parties are handled in a way that benefits the retirement account and not the plan participant. The rules prohibit transactions between the plan participant and certain individuals known as “disqualified persons”. The outline for these rules can be found in Internal Revenue Code Section 4975. In general, the definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the 401(k) Plan participant, any ancestors or lineal descendants of the 401(k) Plan participant, and entities in which the 401(k) Plan participant holds a controlling equity or management interest. When it comes to real estate, a 401(k) Plan participant or any disqualified person may not be directly or indirectly personally involved or personally benefit directly or indirectly from the real estate transaction. For example, a 401(k) Plan participant cannot purchase home and personally live in it or have any disqualified person (i.e. parent, child, spouse, daughter/son-in-law, etc.) personally use it.
*The deposit and purchase price for the real estate property should be paid using Solo 401(k) Plan funds or funds from a non-disqualified third-party.
*No personal funds or funds from any “disqualified person” should be used.
*All expenses, repairs, taxes incurred in connection with the Self-Directed Solo 401(k) Plan real estate investment should be paid using retirement funds – no personal funds should be used
*If additional funds are required for improvements or other matters involving the real estate investments, all funds should come from the Solo 401(k) Plan or other retirement funds or from a non “disqualified person.”
*If financing is needed for a real estate transaction, only non-recourse financing should be used. A non-recourse loan is a loan that is not personally guaranteed and whereby the lender’s only recourse is against the property and not against the borrower.
*No services should be performed by the Solo 401(k) Plan holder or “disqualified person” in connection with the real estate investment by the retirement account. In general, other then typical trustee type of services (necessary and required tasks in connection with the maintenance of the plan), no active services should be performed by the plan participant or a “disqualified person” with respect to the real estate transaction.
*Title of the real estate purchased should be in the name of the Self-Directed Solo 401(k) Plan. For example, if Joe Smith established a Self-Directed Solo 401(k) Plan and the plan was named ABC LLC 401(k) Plan, title to real estate purchased by Joe’s Self-Directed Solo 401(k) Plan LLC would be as follows: Joe Smith Trustee of the ABC LLC 401(k) Plan.
*Keep good records of income and expenses generated by the real estate investment.
*All income, gains or losses from the Self-Directed 401(k) Plan real estate investment should be allocated to the 401(k) Plan.
*Make sure you perform adequate diligence on the property you will be purchasing especially if it is in a state you do not live in.
*Make sure you will not be engaging in any self-dealing real estate transactions, which would involve buying or selling real estate that will personally benefit you or a “disqualified person.”
Related: How to Choose the Best Solo 401(k) Provider

The Cherwenka case (In Re Cherwenka (113 AFTR 2d 2014-2333) (508 B.R. 228), (Bktcy Ct GA), 03/06/2014) involved a Georgia statutory bankruptcy estate exemption for IRAs, which covered a Self-Directed IRA held by Michael Cherwenka, who was in business of “flipping” houses. Michael Cherwenka established a Self-Directed IRA to buy real estate.
The Cherwenka case is really the first case that offers a detailed framework about the type of activities or tasks a Self-Directed IRA real estate investor can perform without triggering the IRC 4975 prohibited transaction rules. In the case, Cherwenka was not compensated for any real property research he performed, nor was he compensated for any recommendations, management or consulting services he provided relating to how the IRA properties were improved before resale.
Cherwenka explained his role in buying and selling of these properties as being limited to identifying the asset for purchase and later selling the asset. Cherwenka engaged contractors to decide or oversee the scope of work with improved properties. Cherwenka testified that he “read and approved” the expense forms prior to the IRA custodian paying funds to reimburse the submitted expenses. Contractors were paid by the job, which accounted for labor costs, but no management fee or additional cost was included in the expenses submitted to the IRA custodian. Cherwenka stated he would inspect or confirm that work was completed through site visits or communication with his “team” before he would approve expenses to be paid by the IRA custodian.
Because most Self-Directed IRA or 401(k) Plan real estate investors tend to perform the same sort of tasks that Cherwenka performed, such as locating the property, reviewing transaction documents, engaging contractors to perform property improvements, inspection of improvements, approval of expenses, and coordinating with the IRA custodian regarding the real estate, the case offers a clear blueprint for the type of activities or tasks that a Self-Directed IRA real estate investor can do without violating the IRC Section 4975 prohibited transaction rules.

IRA Financial is one of the few IRA Custodians that allows individuals to use a Roth Solo 401(k) to invest in real estate. While IRA Financial allows individuals to use a Roth Solo 401(k) to Invest in real estate, not all IRA Custodians allow this option. Hence, it is important to find an IRA custodian that allows us to use a Roth Solo 401(k) to invest in real estate.

A Roth Solo 401(k) combines features of the traditional 401(k) with those of the Roth IRA. Like a Solo 401(k) Plan, the Roth Solo 401(k) Plan is perfect for self-employed individuals or small business owners with no employees.
It contains the same advantages of a Solo 401(k) Plan. However, as with a Roth IRA, contributions are made with after-tax dollars. While you don’t get an upfront tax-deduction, the Roth 401(k) account grows tax-free, and withdrawals taken during retirement aren’t subject to income tax if you’re 59 1/2. Additionally, you must have the account open for five or more years.
In addition to these benefits, a Roth Solo 401(k) to Invest in real estate offers the following advantages:
*Power of Tax-Free Investing: One of the main attractions to the self-directed Roth Solo 401(k) for real estate is based on the fact that qualified distributions of Roth earnings are tax-free. Roth Solo 401(k) plan participants will never pay tax on Roth distributions. When you contribute to a Roth Solo 401(k) plan, income and gains you generate will be tax and penalty-free. This is among the main advantages of a Roth Solo 401(k).
*Unlike with a pretax Solo 401(k) plan, contributions to a Roth Solo 401(k) are not tax deductible. Take a look at the following examples to better understand the power of tax-free investing.