Closing on Solo 401k Real Estate Duplex

 

I am very close to closing on a property (duplex) with funds I have transferred from a qualified IRA (in my name) to a Self-Directed 401k plan established for my self-employment business entity.

QUESTION 1: My business is a sole proprietorship. Chase Bank set up a solo 401k checking and savings account in both my name and my wife’s name.  Does it matter that the money I transfer from my IRA be transferred to only the solo 401k accounts in my name?

ANSWER:  First you should confirm with Chase Bank by reviewing the bank statements that they setup the bank accounts in the name of the Solo 401k instead of each of your names. For instance, the name of your Solo 401k is ABC Solo 401k and both you and your spouse are making contributions including rolling over funds, each Solo 401k bank account would be setup as follows:

 Bank Account 1: ABC Solo 401k; FBO Jack Doe

Bank Account 2: ABC Solo 401k; FBO Janet Doe

Separate bank accounts are required for each Solo 401k trustee/participant because each of their respective contributions, rollovers and investment gains/losses and expenses must be separately accounted for.

QUESTION 2:  Once I start receiving rent checks and deposit them.  Does it matter which accounts I deposit them into?  

 ANSWER:  Yes it matters. For example, if you and your spouse both use your respective Solo 401k’s to purchase the property (duplex); the investment gains and expenses must be shared based on the percentage of ownership in the duplex.

 For example, if your Solo 401k purchased 60% of the duplex and your spouse’s Solo 401k purchased the other 40%, then your Solo 401k would be responsible for 60% of the duplex expenses and would also received 60% of the rents or sale proceeds. Obviously your wife’s Solo 401k would share in 40% of the expenses and profits from the duplex.

Furthermore, at the time of purchase, the real estate purchase documents including the deed can be recorded in one following two ways, for example:

Option 1: ABC Solo 401k

Option 2: ABCK Solo 401k; FBO Jack Doe 60%; ABCK Solo 401k; FBO Jane Doe 40%

The important pieces here are that the real estate purchase documents reflect the Solo 401k as the buyer and that Solo 401k funds are used. Then, as explained above, as trustees of the Solo 401k, you will need to allocate the rents and profits to your respective Solo 401k bank accounts based on the percentage of ownership in the duplex real estate.

QUESTION 3: Does it matter if I transfer the rent money back to my original IRA as long as it’s a qualified plan?

 ANSWER: It most certainly matters that the funds are returned back to the Solo 401k.  Since Solo 401k funds are making the purchase of the duplex, the profits and expenses must flow back to the Solo 401k, not your IRA. 

Lastly, as the Solo 401k trustee you are in control in making the investment decisions, safekeeping the real estate investment documents, transmitting the Solo 401k funds and properly filling out the real estate forms. Therefore, it is important that you document all the Solo 401k transactions properly. Visit Solo 401k Real Estate to review procedure for purchasing real estate with your Solo 401k. Further, visit Solo 401k forms for list of free forms including real estate forms for documenting Solo 401k real estate purchases, sales, and deposits