Taxes for Solo K investing in MF syndication

Multi-Family and Apartment Investing
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Taxes for Solo K investing in MF syndication

T Lee
Austin, TX · Member since 2013 · 16 posts · 2 votes

Would someone please explain the difference in taxes between investing in MF syndication using Solo K versus using "regular" funds from my checking account?  

Let's say I invest $100k in a MF syndication, giving me 20% interest, and I get quarterly distributions, plus when the apartment complex is sold, I get a share of the profit from the sale. Cost segregation is used.

1. If I use my Solo K to invest in the syndication, what taxes would I pay on monthly or quarterly distributions? What taxes would I pay on my 20% share of the profit from the sale -- would the profits be taxed at the UBTI rate of 37%? 

2. If I use "regular" money from my checking account to invest in the syndication, then what taxes would I pay on the distributions and the profit?

3. How does taxation change if cost segregation is not used? 

Thank you to anyone out there kind enough to help me understand this! 

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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
6y

@T Lee

The Solo 401(k) will not be taxed on the income produced by the investment.  UBTI is not generated from passive rental income.

The Solo 401(k) grows over time with compounding of the tax-sheltered income, just like it would if it were receiving dividends on a stock investment.

When you personally take a distribution in retirement, you will pay tax on the amount of any such distribution.

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @T Lee

    The Solo 401(k) will not be taxed on the income produced by the investment.  UBTI is not generated from passive rental income.

    The Solo 401(k) grows over time with compounding of the tax-sheltered income, just like it would if it were receiving dividends on a stock investment.

    When you personally take a distribution in retirement, you will pay tax on the amount of any such distribution.

    2Reply
  • Scott JensenPro Member
    Financial Advisor · Blaine, MN · Member since 2014 · 478 posts · 387 votes
    6y

    @T Lee to add to what @Brian Eastman said, when you take distributions from your 401(k) it is taxed at your ordinary income tax rate (just like W2 wages).  There are no taxes on any of the income or even real estate sales as long as the funds stay with the 401(k).

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  • T Lee
    OP
    Austin, TX · Member since 2013 · 16 posts · 2 votes
    6y

    Thank you so much!! @Brian Eastman @Scott Jensen

    Does it matter if cost segregation is used or not if I invest using my Solo K? 

    If I use "regular" funds to invest, and cost segregation is not used, would I pay capital gains tax on the distributions and profit from the sale? Or, would I pay ordinary income tax on the distributions and profit from the sale?

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @T Lee

    Cost segregation and depreciation do not impact a Solo 401(k) investment in any way.

    Income from the investment to the 401(k) is not taxed.  No taxes, no deductions needed.

    When your IRA/401(k) today invests in shares of a publicly traded company, are there any taxes or deductions? No. Same thing here.

    1Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    6y

    @T Lee

    There may be a potential tax that the Solo401K has to pay if the syndication has income that is considered "UBTI"(Unrelated business taxable income)

    You should speak to the sponsor prior to investing to check if there are any UBTI concerns with the fund you will invest in.

    Rental income is normally not subject to UBTI. However, there are instances when it would be.
    I.E. the syndication invests in MF's that provide services(think hotel) or if the debt is leveraged.

    [email protected]917-280-8544
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  • Luke Miller
    Investor · Front Royal, VA · Member since 2013 · 586 posts · 418 votes
    6y

    @T Lee a couple things:

    UBIT is not taxed on passive rental income because it's not treated as income, its treated a a disbursement. This is how you're able to show a "loss" on paper while still receiving cash flow. 

    You might want to look into an eQRP. It's similar to a Solo 401k, but it might have some benefits for you. I'll send you a link to talk to someone if you're interested. 

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    6y

    @Luke Miller

    You are using two different terms but referring to the same plan. 

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  • Luke Miller
    Investor · Front Royal, VA · Member since 2013 · 586 posts · 418 votes
    6y
    Originally posted by @Dmitriy Fomichenko:

    @Luke Miller

    You are using two different terms but referring to the same plan. 

    Are you saying solo 401ks are the same as an eQRP? That’s not what I have been told.  

    0Reply
  • Todd Goedeke
    Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes
    6y

    @Luke Miller, tell us the difference between a Solo 401k and a eQRP? I have been told by a tax attorney there are none.

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @Todd Goedeke

    QRP is a broad term that applies to all Qualified Employer Plans of which there are many: 401(k), Solo 401(K), Profit Sharing,  403(b), etc.

    There are a few folks aggressively marketing under the label "QRP" or "eQRP" to make it sound like they have created something unique and fancy.  In some cases the plan offered is a Solo 401(k).  Sometimes they recommend an "ERISA" full blown 401(k) for the added benefit of stronger bankruptcy protections.  

    Unless you have a business with employees that would require an ERISA 401(k) the Solo 401(k) version is much simpler, easier & less expensive to administer, and sufficiently robust in terms of segregating retirement and personal finances.

    While not entirely true in all cases, I would equate eQRP with "shiny object" marketing.  A very small segment of investors will legitimately benefit from such plans.

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  • Luke Miller
    Investor · Front Royal, VA · Member since 2013 · 586 posts · 418 votes
    6y

    Thank you, @Brian Eastman for explaining it so I didn't have to. That was my experience as well.

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