401K withdrawal due to Covid 19

[Joey Hicks]

Has anyone taken or considered taken the Covid 19 Cares act $100,000 out of their 401k to purchases additional properties? What are you all's thoughts? My thoughts are that you could buy a property and depreciate it over the three years to cover the taxes. Of course I would check with a tax professional first.

[Nicholas Aiola]

@Joey Hicks @Chris Levarek

There is a lot to unpack here but I will try to cover what I can. This goes without saying but seek your own advisors for advice specific to your situation.

First, in order to withdraw money from your retirement account and escape the 10% early withdrawal penalty and be eligible for the 3-year payback without paying income tax on the distribution, it must be a "coronavirus-related distribution". This means you must have been diagnosed with coronavirus, have cared for someone who was diagnosed with coronavirus, or have been financially impacted as a result of the virus or any shutdowns.

If you don't qualify, the distribution will be taxable and subject to the 10% early-withdrawal penalty.

Second, you cannot accelerate the depreciation of real property. Residential rent property will be depreciated over 27.5 years. A cost segregation will allow you to allocate a portion of your cost to personal property which can be eligible for bonus depreciation or accelerated depreciation, likely resulting in a net loss. But that brings me to my next and final point...

Third, you can only deduct net rental losses  against nonpassive income (like a distribution from a retirement account) in one of two scenarios: (1) your income is less than $150k. You can write off up to $25k of net rental losses against nonpassive income if your income is below $100k. If your income is between $100k-150k, your allowable deductible loss may be limited. Once your income exceeds $150k, your rental losses will be suspended and carried forward. With a $100k withdrawal from a retirement account, I'm sure this would push a lot of people over the income threshold, even if it is spread out over 3 years. Or (2) you are a real estate professional.

Keep in mind, even if you are a real estate professional, if you are investing passively in syndications as an LP and your income is over $150k, your share of the losses from the syndication will likely not be deductible against nonpassive income.

Again, it would be wise to speak with your CPA to get advice tailored to your situation.