Receive news, updates and special deals by Joining AOA's Online Newsletter. Click now to sign up!

Invest in Real Estate TAX-FREE With the Solo 401K Retirement Plan – By Dmitriy Fomichenko

Posted on 01. Oct, 2013 by in all

Facebook Twitter Email Linkedin Digg

Solo 401k is the ultimate retirement plan that offers powerful advantages for real estate investors.  Solo 401k is also known as the Individual 401k or Owner-Only 401k and is an IRS-approved Qualified Retirement Plan (QRP) that has been simplified for the small business owner and self-employed.  The structure of the plan gives participants more options than a conventional 401k or Self-Directed IRA.  The Solo 401k’s unlimited investment capability, loan feature, and tax benefits make it the perfect vehicle for investing in real estate.

Unlimited Investing

While conventional retirement plans only allow investment into traditional assets such as stocks, bonds, and mutual funds, the 401k Plan can be invested into both traditional and non-traditional assets, such as real estate.

Investing in real estate with the Solo 401k Plan is fully allowable under the Employee Retirement Income Security Act (ERISA) of 1974.  The only exceptions are those outlined in the Internal Revenue Code Section 4975, which includes collectables and any transactions with disqualified person.  The details can be viewed on the IRS website:

www.irs.gov/pub/irs-drop/rr-06-38.pdf.

The Ultimate Retirement Plan can be invested in the following types of real estate:

  • Residential property
  • Commercial property
  • Single family rental property
  • Multi-family apartment buildings
  • Townhomes and condominiums
  • Mobile & Manufactured Homes
  • Raw Land

As well as the below real estate related investments:

  • Mortgage notes
  • Tax deeds
  • Tax liens
  • Private/Hard money loans

The process of investing in real estate with the Solo 401k is very similar to purchasing a property personally.  After establishing and funding the Plan, the funds are ready to be invested into real estate.

Once a property is identified and due diligence is conducted, the property is purchased in the name of the Solo 401k Plan.  The title to the property and all transaction documents are in the name of the plan.  As trustee of the plan, the participant signs all documents in the name of the Solo 401k.  All expenses must be paid from the Solo 401k plan, and all income and gains from the investment must be deposited into the Solo 401k account.

If the Solo 401k account does not have sufficient funds to purchase the property, there are two possible options.  First, the Solo 401k can purchase an interest in the property in partnership with another non-disqualified person.  For example, the Solo 401k can be used to purchase 50% of the property with a non-disqualified partner purchasing the remaining 50%.  The investment from the Solo 401k account would go directly into the property.  All property expenses would be divided between partners, in relation to the percentage of ownership.  All income or gain from the property would also be divided between the partners in relation to the percentage of ownership in the property.

A second option to purchasing a property with the Solo 401k is obtaining a non-recourse loan.  A non-recourse loan is the only form of debt financing that can be used in conjunction with the Solo 401k.  A recourse loan is considered a prohibited transaction.

Direct Access and Speed

Investments using the Solo 401k do not require custodian consent.  Plan participant acts as the trustee of the plan and has checkbook control over the plan funds.  The investment can be made as simple as writing a check.  Decisions can be made and acted upon quickly.  This gives an advantage in real estate investments, in which time is of the essence.

Loan Provision

The Solo 401k Plan also contains a provision which allows the participant to borrow from the account at any time and for any purpose.  The Solo 401k loan can be made for up to 50% of the account or $50,000, whichever is less.  These loans can be used for any purpose.

Roth Sub-Account

The Solo 401k Plan comes with the Roth sub-account allowing a plan participant to make after-tax (Roth) contributions into the Roth bucket of the Solo 401k plan.  All investments made using Roth Solo 401k are completely tax-free.  That means that no income tax on the rental income received from the property and no capital gain taxes on the sale of the property.  The potential return on investment using Roth Solo 401k could be infinite, especially if leverage is used! 

Tax Benefits

Using the Solo 401k to purchase real estate enables tax-free or tax-deferred gains and income generated by the investment property.  Profits from real estate investments returns to the account and continue to grow sheltered from taxes.

High Contribution Limits

Plan participants are allowed to contribute up to $51,000 per year into the plan.  Those who are over 50 years of age can take advantage of additional $5,500 catch-up contribution.  If the spouse of the business owner is participating in the business, he or she can also participate in the plan which would make the total contribution to the plan be up to $113,000 per family.  This makes the Solo 401k plan great tax-sheltering vehicle.

The Solo 401k retirement plan offers many advantages, making it the perfect vehicle for real estate investments.  To learn more about its features and benefits please visit: http://www.sensefinancial.com/services/solo401k/.

Dmitriy Fomichenko is the founder and president of Sense Financial Services LLC.  He began his career in financial planning and real estate investing in 2000. He owns multiple investment properties in various states and is a licensed California Real Estate Broker. Over the years, he has instructed dozens of investment and financial planning seminars and has mentored hundreds of investors.

Sense Financial Services is based in Southern California but helps clients nationwide.  Over the years they assisted hundreds of clients obtain checkbook control over their retirement funds giving them the freedom and ability to invest in real estate.  They can be contacted at (949) 228-9393 or on the web at www.SenseFinancial.com.