Rehab of solo 401k property by sibling (brother)

QUESTION: Once I buy a property with my solo 401k trust, can I hire my brother as general contractor to do the rehab on the property? I will still be the property manager, he would be the one doing the actual work on the property. I will pay him from the trust.

ANSWER: While a sibling is not technically a disqualified party under IRC 4975—the code section dealing with solo 401k prohibited transactions—if  the solo 401k owner’s brother is the general contractor for the solo 401k owned real estate property, it is important not to overpay the brother. In other words, the brother must receive a similar payment for his services as any other person performing the same service would charge. Lastly, yes rehab payments are required to be paid with solo 401k funds since the property is owned by the solo 401k. 

Thank you,

Josh in South Carolina

Solo 401k non-recourse loan for renovation expenses

QUESTION: If  we have to make renovations to properties owned by the solo 401k, can I write out a check straight to them from the 401K Trust.  Can I get a non-recourse loan to help with the renovations?

ANSWER: Correct that real property renovation expenses must be paid with funds from the solo 401k because it is a solo 401k owned asset. No you can not get a non-recourse loan to cover real-estate-renovation expenses. Reason being, a non-recourse loan is employed for the purchase of a property not for covering renovation expenses.

Gary in New Mexico

Can Solo 401k purchase investment property from myself?

QUESTION: If I currently have investment properties, can I set up a solo 401k, then purchase my investment properties from myself?

ANSWER: No because you as the solo 401k owner fall under the disqualified person category. Reason being, the regulations strictly prohibit the shifting, sale or exchange of a personal asset including real estate to a solo 401k or vice versa. Following is the specific section of IRC 4975, the section of the code that covers prohibited transactions, covering this specific scenario.

IRC Specific Code Section

“The sale, exchange, or lease of property between the plan (e.g., solo 401k plan)  and a disqualified person.”

Regards, 

Tricia in North Carolina

Solo 401k Escrow Deposit Question

BACKGROUND: We wrote a check for $2,000.00 out of the Solo 401K account to a title company as earnest money on the purchase of a rent house.  We opted out of the purchase after the inspection.  The title company returned our earnest money.  They wrote their $2,000.00 check payable to my name personally.

QUESTION: Can we deposit this check into the Solo 401K account, or will the title company need to re-issue a check made payable to Solo 401K?

ANSWER: Because solo 401k funds were used for the earnest deposit, which is the correct method since the solo 401k plan was the party making the purchase, the reimbursement check will need to made payable in the name of the solo 401k plan, as making it payable in your name personally would in effect look like you received the reimbursement personally.

Thank you,

Christi in Wyoming