Can You Invest in Real Estate With a Solo 401(k)?

Real estate investors often ask whether retirement funds can be used for more than stocks and mutual funds. In some cases, a Solo 401(k) can invest in real estate, provided the plan document allows it and the investment follows retirement plan rules.

The opportunity is appealing: you can direct retirement assets toward a property or real estate investment you understand. But the plan must make the investment for its own benefit. It is not a way to buy a personal vacation home or move money between yourself and your retirement account.

What kinds of real estate investments are possible?

Depending on the plan document and the facts of the transaction, a Solo 401(k) may be able to invest in:

• Rental property
• Land
• A real estate partnership or syndication
• Certain real estate loans or notes

The plan could own a property directly or hold an interest in an entity that owns real estate. Each structure has different paperwork, operating requirements, and tax questions. Review those details before committing plan funds.

Who owns the investment?

The Solo 401(k) owns the investment, not you personally. That distinction needs to carry through the transaction.

Purchase documents should identify the proper plan ownership. Income attributable to the investment generally goes back to the plan, and expenses attributable to it should be paid with plan assets. Keep records that clearly separate plan activity from your personal finances.

For example, if the plan owns a rental property, rent should not be deposited into your personal bank account. Likewise, repairs should not be casually paid from your personal account and sorted out later.

The rule investors cannot overlook: prohibited transactions

Retirement plans face restrictions on transactions involving people and businesses connected to the plan. The IRS calls these disqualified persons. The rules can affect sales, leases, loans, services, and any use of plan assets for a disqualified person’s benefit.

That means an investor should pause before proposing to:

• Sell a property they already own to their Solo 401(k)
• Stay in a property owned by the plan
• Rent plan-owned property to a family member
• Personally guarantee financing for a plan investment
• Perform work on a plan-owned property or have a related business do the work

The outcome depends on the parties and the transaction. Do not assume that a deal is permitted simply because it appears to be at a fair price. Ask a qualified retirement plan attorney or tax professional to review a transaction that involves you, your family, or a business you control.

What about investing in a real estate syndication?

A syndication may offer a way for a Solo 401(k) to participate in a larger real estate project without managing a property directly. But the investment documents, ownership structure, fees, financing, and any relationship you have with the sponsor all deserve review.

Ask how the investment will be titled, where distributions will be sent, how its value will be documented, and whether the underlying activity could create tax or reporting obligations for the plan. An investment being marketed as “retirement account eligible” does not resolve every question for your particular plan.

Before you invest, ask these five questions

1. Does my plan document permit this investment?
2. Is anyone involved a disqualified person or a business connected to one?
3. Does the plan have enough cash for the purchase and future expenses?
4. Will financing or business activity create additional tax or reporting issues?
5. Who will maintain the ownership, valuation, and transaction records?

A Solo 401(k) can provide investment flexibility, but flexibility comes with administrative responsibility. Set up the plan correctly, review the specific transaction, and keep the plan’s money and property separate from your own.

Exploring real estate investing with a Solo 401(k)? Book a free 30-minute consultation to discuss eligibility, plan setup, and questions to take to your tax or legal adviser. You can also call 833-224-5517.

This article is for educational purposes and is not individualized tax, legal, or investment advice.