The Solo 401k Plan – The Power to Invest in Commercial Real Estate Equity and Debt

The Solo 401k Retirement Plan offers powerful advantages for real estate investors. A Solo 401k Plan (also known as Individual 401k) is an IRS-approved Qualified Retirement Plan that has been simplified for the self-employed and those who own a small business. The structure of the plan gives participants more options than a conventional 401k. 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 Solo 401k Plan can be invested into both traditional and non-traditional assets, such as real estate.

Investing in real estate with the Solo 401k 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 persons.

The Solo 401k 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 real estate related investments:

• Mortgage notes

• Tax deeds

• Tax liens

• Real Estate syndications

• Real Estate debt or equity Funds

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 returned to 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. The 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 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.

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 return to the account to continue growing sheltered from taxes.

The Solo 401k retirement plan offers many advantages, making it the perfect vehicle for real estate investments.

To learn more about the Solo 401k features and benefits please visit: https://www.sensefinancial.com/solo401k/

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Learn more about how to use your retirement fund to invest in Commercial Real Estate here.