Distribute real estate property from a self-directed 401k

BACKGROUND: My husband and I are getting ready to close in 10 days on a property where we are 50-50 co-owners as husband and wife with my self-directed 401k.  Our intention is to rent this property out for a number of years.

QUESTION: I am thinking down the road and wondered what we do if we ever wanted to move into that place as a part time retirement residence in say, 5 years?  I realize that we are not allowed to use the real estate asset personally since it is owned by the self-directed 401k, but if we wanted to use it in the manner that I described, what would we have to do?

ANSWER: Good question. The percentage of the property owned by the self-directed 401k would have to be distributed in-kind and taxes paid.

Therefore, after the property was distributed in-kind to you, the property would be owned by you personally outside of the self-directed 401k and you could then live in it.

Put differently, instead of taking a cash distribution from the self-directed 401k, you would take a distribution in the form of real estate. Therefore, the same tax distribution rules that apply to a cash distribution from a self-directed 401k would apply to real estate distributed in-kind from a self-directed 401k. You would have to pay federal income taxes and state taxes on the value distributed. It is important to also note that the self-directed 401k owned real estate property would first need to be appraised before processing the in-kind distribution. Lastly, the real estate property deed would need to be granted from the self-directed 401k to your personally.

Thnx

Lisa in South Carolina