A couple questions regarding the purchases / investment of real estate as done through a Solo 401k plan.
QUESTION 1: Does it matter what the solo 401k purchased real estate is used for?
ANSWER: Yes it certainly matters. For example, if used to operate a business, investment gains over $1,000 will be subject to UBIT (a type of tax that applies to a solo 401k that invests in an operating company). What’s more, neither the solo 401k owner (you) nor any of his or her relatives such as a spouse, parents, grandparents, children and solo 401k providers, may rent or use the solo 401k owned real estate property.
QUESTION 2: In other words, could real estate purchased with Solo 401k funds be used as one's primary residence?
ANSWER: No as described above because you are a disqualified party and thus prohibited from using the assets of the solo 401k including real estate for your personal use.
QUESTION 3: Also, if real estate is purchased with the intent of using it as a rental property, would 100% of the income derived from that rental property have to be deposited into the Solo 401k, or would it be based upon the donation rules (17,500 per individual per year, plus a percentage of income earned as self-employed) ?
ANSWER: Any rental income or proceeds from the sale of the property must flow back to the solo 401k bank account because it is an asset of the solo 401k.
QUESTION 4: I currently own a rental house, but if / when my funds in my Solo 401k amass to a large enough amount, I would like to pay off the mortgages on the house. Would doing that require all the rental income to go directly into the Solo 401k, or could I keep collecting the rental income (although doing so subjects me to taxes) without any additional penalties?
ANSWER: Again, you cannot invest the solo 401k funds in your own house because you are a disqualified party. However, you could process a solo 401k loan from the solo 41k and use it towards your primary residence or for any other purpose. However, the solo 401k loan proceeds would no longer be deemed solo 401k funds. Therefore, any income generated from the solo 401k loan proceeds could not be put back into the solo 401k. Please click here to learn about the solo 401k loan rules.
Thanks
Jake in Massachusetts
QUESTION 1: Does it matter what the solo 401k purchased real estate is used for?
ANSWER: Yes it certainly matters. For example, if used to operate a business, investment gains over $1,000 will be subject to UBIT (a type of tax that applies to a solo 401k that invests in an operating company). What’s more, neither the solo 401k owner (you) nor any of his or her relatives such as a spouse, parents, grandparents, children and solo 401k providers, may rent or use the solo 401k owned real estate property.
QUESTION 2: In other words, could real estate purchased with Solo 401k funds be used as one's primary residence?
ANSWER: No as described above because you are a disqualified party and thus prohibited from using the assets of the solo 401k including real estate for your personal use.
QUESTION 3: Also, if real estate is purchased with the intent of using it as a rental property, would 100% of the income derived from that rental property have to be deposited into the Solo 401k, or would it be based upon the donation rules (17,500 per individual per year, plus a percentage of income earned as self-employed) ?
ANSWER: Any rental income or proceeds from the sale of the property must flow back to the solo 401k bank account because it is an asset of the solo 401k.
QUESTION 4: I currently own a rental house, but if / when my funds in my Solo 401k amass to a large enough amount, I would like to pay off the mortgages on the house. Would doing that require all the rental income to go directly into the Solo 401k, or could I keep collecting the rental income (although doing so subjects me to taxes) without any additional penalties?
ANSWER: Again, you cannot invest the solo 401k funds in your own house because you are a disqualified party. However, you could process a solo 401k loan from the solo 41k and use it towards your primary residence or for any other purpose. However, the solo 401k loan proceeds would no longer be deemed solo 401k funds. Therefore, any income generated from the solo 401k loan proceeds could not be put back into the solo 401k. Please click here to learn about the solo 401k loan rules.
Thanks
Jake in Massachusetts
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