With the Self-Employed Qualified Plan 401 k, you can make investments on non-traditional assets particularly real estate. Real estate is a viable investment option simply because it is considered tangible and solid asset. Controlling your real estate assets is more feasible unlike the stock market. Thus, more and more plan participants consider rolling over their SEP or IRA funds into the Self-Directed 401(k) retirement plan. Purchasing a real estate property with the use of your self directed retirement fund is possible. However, make sure that you leverage your investment with non-recourse loans. Recourse loans on the other hand are referred to as prohibited transactions in the Individual k niche.
Self-Employed Qualified Plan 401 k and Non-Recourse Loan
The individual or plan participant does not guarantee the non-recourse loan. In fact, the loan is basically limited to the collateral, which also secures the loan. For instance, the non-recourse loan is secured or limited to the real estate property which is also the collateral. This make non-recourse loans considered riskier for lenders. However, since the individual or account owner is not the guarantor of the loan, it is not a restricted transaction according to the IRS. Based on the IRC Section 514, the non recourse financing is allowed for the Solo 401(k). Moreover, the UBTI or Unrelated Business Taxable Income tax is not triggered when you use the non-recourse loan. You can finance your real estate property investment and still get the Solo k tax breaks through this loan type.
Non-Recourse Loan Requirements and Qualifications
There is usually a required 30% to 35% down payment from the non-recourse lender. Account holders that have this amount for the property price could apply for the loan. There is an approval process that account owners must undergo before getting their funding. Moreover, non-recourse lenders also subject the property for appraisal before the approval is given or not. It is also imperative that the property can generate enough Net Operating Income in order to go beyond the 20% to 25% scale for debt payments. The non-recourse loan is applied or approved for investments on eligible rental properties. Self-Employed Qualified Plan 401 k owners may use non-recourse loans to purchase of single detached family residential properties. Other allowed investments include PUDs, warrantable condos, multifamily homes, and 4-plexes.
It is important to know the importance of a non-recourse loan for the Self-Employed Qualified Plan 401 k investment. Learn more about ineligible properties and prohibited transactions as well.
. Self-Directed 401(k) retirement plan
. Individual k
. Solo 401 k retirement plan