Solo 401k Loan: Using Leverage to Purchase Real Estate
Using a 401k in combination with a loan can require expert help. Read on for a recent question we received.
I would like to establish an owner-only 401(k) and use my retirement account funds to purchase real estate. I want to partner on the deal with my friend, an unrelated party, who will qualify for a loan. He will be using his own credit to qualify for the loan, and my solo 401k plan will be cash-partner.
So here is my question: Would this scenario be allowable with the owner-only 401(k)? The plan funds would be used for the down payment and the other, non-related person will obtain a conventional loan.
Considerations with the 401k
The issue is whether the transaction would result in Unrelated Business Taxable Income (UBTI) to the plan.
UBTI can arise when a plan invests in debt-financed property. However, Code §514(c)(9) permits 401(k) plans, like the owner-only 401(k), to use non-recourse leverage when purchasing real estate without being subject to UBTI.
However, to qualify for this special rule, several considerations must be met:
- The price paid for the property must be fixed when the property is acquired
- The indebtedness cannot be contingent on revenue, income, or profits from the property
- The property may not be leased to the person who sold the property to the plan or to any disqualified person. Also, the property may not be purchased from or leased to the employer maintaining the plan.
Conclusion
As you can see, unique situations require an expert’s help. The IRS does define prohibited transactions- what you cannot use your retirement plan for or with. As long as you stay within their guidelines, there is an almost unlimited range of investment opportunity.
Sense Financial establishes self-directed retirement accounts, giving the account holder control to invest their retirement funds in these allowable opportunities. The owner-only 401k, or Solo 401k, requires a form of self-employment without full-time employees. The self-employed small business owner can gain checkbook control over their retirement funds. They can invest as easily as writing a check, without the need for a custodian.
Contact one our our retirement account experts for a free consultation to discuss your specific situation and to help you obtain checkbook control over your retirement account.
Related Terms:
- Individual 401k
- Solo 401k Limits
- Solo 401k Rules
- Solo 401k Real Estate
- solo 401k loan