BlogProposed Solo 401k Trust and Personal Funds Real Estate Property Purchase
Posted about 6 months ago

Proposed Solo 401k Trust and Personal Funds Real Estate Property Purchase

QUESTIONS & BACKGROUND: 

We are thinking of buying a property in the solo 401k trust.

It seems we hold the title in the solo 401k trust. Repairs/Improvement money needs to be from the 401k only or a non-recourse loan.

Assuming the above is correct…

* We have a question if we can own 50% solo 401k trust & 50% personal or through self owned LLC?

ANSWER: 

Your proposed transaction would not allow for a non-recourse loan because you and your business are considered a disqualified party. If done as an all cash purchase, this would fall under a TIC transaction. See the rules outlined in the following page: https://www.mysolo401k.net/co-investing-solo-401k-real-estate-tenants-common/

MORE QUESTIONS & BACKGROUND: 

We understand this still means we are not able to use the property for ourselves. It will be for investment purposes. Correct?

We plan on building a home. If we own it 50/50 it will be easier for us to fund quickly and give us a 50% tax shelter on the gains when we sell.

The second question would be if we decided in the much later future to keep the property or convert it to use for ourselves… what would the rules be on that? A lateral transfer with refund back to the 401k for the other half? 

ANSWER:

You would have to distribute the portion owned by the solo 401k as in-kind distribution and pay taxes based on the fair market value at the time of the in-kind distribution. See the following: https://www.mysolo401k.net/real-estate-solo-401k-in-kind-distribution-rules-and-reporting/

QUESTION: 

Alternatively:

If we took a loan from the 401k instead of giving it interest… What is the max interest rate we could pay back the 401k / repayment terms.

ANSWER: 

Following are some quick facts regarding the solo 401k participant loan rules.

Each participant can borrow from the solo 401k provided each has a solo 401k balance; however, the solo 401k loan calculation is based on each solo 41k participant’s respective loan balance–not the entire value of the solo 401k plan.

The solo 401k loan does not affect your personal credit or business credit score because you are borrowing from the solo 401k plan; therefore, there is no credit check.

The Solo 401k loan term is 5 years for general loans.

The Solo 401k loan term can be more than 5 years not to exceed 15 years if used to purchase principal residence for you as trustee/participant of the Solo 401k.

Solo 401k loan payments are made either monthly or quarterly.

Solo 401k annual contributions from self-employment income cannot be used/applied towards payment of solo 401k participant loans.

Solo 401k participant loan payments must be made with personal funds, not business funds or solo 401k funds.

Since the solo 401k participant is borrowing from the solo 401k plan, at time of loan the loan proceeds must flow to the solo 401k participant’s bank account, not her business. Once the funds are in your personal bank account, you can then disperse them however you wish including placing them in your own business bank account.

The interest rate for Solo 401k loans is either: A certificate deposit rate plus 2 percent or the prime rate plus 1 percent.

Solo 401k Loan payments are fixed payments consisting of interest and principal

Solo 401k loan rules do not allow for Interest only payments or principal payments only.

Each solo 401k participant can borrow from his or her respective solo 401k balance. For example, if both spouse’s are participating in the solo 401k plan and have account balances, each can borrow up to the statutory limits described below.

The maximum Solo 401k loan amount is either 50% of account balance or maximum amount of $50K.

– Example 1: Solo 401k balance is $50K; 50% of $50K = $25K (the Solo 401k maximum loan amount)

– Example 2: Solo 401k balance is $150K; 50% of $150K = $75K; however, the maximum permitted Solo 401k loan amount is $50K

– The minimum Solo 401k loan amount is $1,000.

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