It seems that the reason recourse loans can’t be utilized is because the assets of the 401k can’t be subject to creditors. This assumes that the prospective person is engaging in a direct purchase of real estate.
I’m interested in investing into an LLC which will invest in real estate. The partners of this LLC, of which I’ll be involved in, albeit less than 50%, which is the prohibited transaction level specified by IRC, will then engage in a purchase of said real estate and develop / manage / rent it out. Before even bringing any bank into the equation, I think we both could agree that this transaction as outlined currently is within the limits of the regulations.
Secondly, the LLC members would engage a bank. The bank would require a personal guarantee of members of the LLC, save for the 401K plan or the principal of the 401k plan. LLC management would ensure that the retirement plan would absolutely 100% not be included as collateral.
QUESTION: If these items were to lay out exactly as described above, I feel this transaction would be within the scope of the regulations. What are your thoughts?
If existing LLC: First, when determining the ownership interest in the LLC, in addition to adding your solo 401k plan’s planned membership percentage, you must add your existing membership interest as well as any other family members interest in the LLC to determine if the less than 50% test is satisfied. Further, even if this test is satisfied, neither you nor certain family members may get compensated for the management of the LLC.
If a newly funded LLC: Because the LLC would fall under the newly funded category, the less than 50% ownership threshold would not come into play and, thus, you along with the solo 401k can hold a 50% or more interest in the LLC; however, you could not be compensated for managing the LLC.
Lastly, with respect to the non-recourse loan, even though it would be made to the LLC, it would be prohibited to use non-recourse funds if you were also investing your personal funds in the LLC because you would personally benefit as a result of your solo 401k plan’s investment in the LLC.
Ryan CPA in Oregon