We are looking at buying some investment property. We would like to own it 50/50 with the solo 401k.
QUESTION 1. Is it allowable for me to personally own 50% of the property with the SOLO 401k. Seems like it is allowable at the outset. Correct?
ANSWER:
Yes provided certain rules are followed.
Invest in Real Estate Under a Tenancy in Common (TIC)
Under this method, the title is taken in both of the other tenant and in the name of the solo 401(k). Following is an example as to how the title to the property would read assuming the name of the solo 401k is Chargers Solo 401k Trust and the name of the other tenant
Example: 30/70 split between unrelated person Matthew Brown and his solo 401k plan (Chargers Solo 401k Trust)
How property purchase is recorded: Matthew Brown, an undivided 30% interest, and Chargers Solo 401k Trust, an undivided 70% interest.
Compliance Notes
The percentages of ownership are determined by how much funds each party invests at the time of real estate purchase.
All expenses and income are shared based on the ownership percentages.
The property may be purchased from or sold to a disqualified party (e.g., the solo 401k owner, his or her parents, children, to name a few).
The solo 401k owner is not allowed to use the property for personal use.
QUESTION 2.
How do I sell it someday? It appears that I could not buy the solo 401k's share and the 401k could not buy my share. Correct?
ANSWER:
You can not personally buy the portion your solo 401k owns and vice versa.
QUESTION 3.
This would mean that the only way out of the investment would be for the property to be sold to a 3rd party, correct?
ANSWER:
That is correct, and 3rd party (who is not a disqualified party) would have to purchase the property.
QUESTION 4.
Also, is there a better way to do this? I.e., hold the property in an LLC with me and the 401k as 50/50 owners? Or, does that just make it more complicated? And, would it change anything?
ANSWER:
An LLC can be established to purchase the property. The LLC would be a multi member LLC with you and the solo 401k being the members. With that said, a multi member LLC would have to file Form 1065 on an annual basis and you would need to issue K-1s for each member. https://www.mysolo401k.net/co-invest-with-my-401k-in-a-newly-formed-llc/
An advantage of the LLC is that the income and expenses don't have to be split between the two tenants (contrast with compliance rules described above). Instead, all of the income and expenses would be paid/received by the LLC. See more below:
Invest in Real Estate Using a LLC
When both the unrelated person (in this example Matthew Brown) and the solo 401k (Chargers Solo 401k Trust) pool their funds and invest in a LLC, title to the real-estate property is taken in the name of LLC. For example, if the name of the LLC is San Diego Charges LLC, title on the deed will read San Diego Chargers LLC.