Can I buy a property with cash or have it financed, then sell it to my SDIRA or Solo-401K plan?

Question

I have a bit of a situation with timing.

I have a good deal baking in the oven, it's moving fast and needs to close quick.

I had intended to create a solo-401k plan for a purchase, but I have been dragging my feet on setting it up.  I was going to wait till I have a candidate property, then do it, but now I realize it's too late, most likely it's going to take weeks and seller needs to close fast, even to pay for the EMD I need funds rolled over immediately, so this is not going to happen.

So in order to get this deal done I need to pay all cash or get financing.  My question is, after I acquired the property, is it possible to turn around and set up my SDIRA or Solo-401K (and the LLC associated with that), and sell the property as me individually to my Solo-401K plan?

Will Barnard · Answer

100% no is your answer. You are a disqualified party to your retirement account and can not purchase from you or sell to you from the retirement account. Buy cash or financing and keep it out of your solo 401k. Alternate option, find a partner to buy it in their name (this partner can not be a disqualified party) and then sell to your retirement account for however much more you agree to for their efforts.

Also, stop waiting and set that account up pronto!!!

Dmitriy Fomichenko · Answer

Can't do this, would be prohibited transaction.

Doug McLeod · Answer

Not an expert, but I have heard knowledgeable folks say there is a requirement that purchases into a 401K or IRA be "arms-length" deals - that is you can't sell to your own tax advantaged account.

More importantly, realize that all cash flows on assets owned by an IRA (or 401k) go back to the IRA.  AND when you eventually take it out, all earnings will be treated as ordinary income, meaning you will pay MORE taxes than if you bought it outside of the IRA where you get the cash flow and receive a huge tax benefit through depreciation expense and 1031 exchange rules (upon selling).

So buy that sucker with cash and then do a Cash Out Refi under the Delayed Financing Exception (Fannie Mae) if you are still eligible for such - otherwise get a portfolio loan to retrieve most of your cash back out and keep rolling on to the next property.

Sam Leon · Answer

Jeff,

The issue I am facing with is due to the amount of time it will take to roll the funds from my existing ex-employer's 401k plan to a new solo-401k plan which I was hoping to use to fund this property.

To give you an example, let's say this property is contracted for 300K.

Let's say I have one IRA account with TDAmeritrade say with 100K, Schwab with 100K and a 401K plan with JP Morgan with 500K.

Previously I had inquired with TDAmeritrade, Schwab, and JP Morgan and they all told me all it takes to roll over to another IRA provider is 3-5 days.  If I am holding stocks in those accounts, I need to sell the position and if it takes a few days to settle, then it will take a few more days.  So in my mind, I thought once I have a property with a 30 day period to close, I can set up the solo-401k plan and roll what I need over within 1-2 weeks tops.

Well, once I had the contract executed, I inquired JP Morgan again and this time I got a different answer when they took a closer look.  They told me there is an issue, and that is within my portfolio, I have about 20K worth of my ex-employer's company stock, that was put in there as part of their profit sharing.  Now since my ex-employer is not a publicly traded company, I would need to sell these stocks back to them.  I said, I don't need that 20K, I don't need the whole thing, I only need about 100K out of that account to make my purchase.  They said no, the way the plan was set up, I had to roll 100% out, I can't roll some of it and leave some of it.  For this reason I have to sell those private company stock back to them.  So I said OK, sell it then.  They came back and say they are not a public company and as such, they only do buy backs once in a while.  The next one is OVER A MONTH AWAY!

So I am stuck.  I had to wait till they open the door for the buy back, sell it, then I can roll them over...

Meanwhile that other property I have a contract on has to close in 30 days because seller needs the fund for another investment.

So what I have is this ridiculous timing issue.

I assume it is also a PT if roll the other accounts over and use the new Solo-401k account to fund part of it and use cash for the rest?In other words, can the LLC in my Solo-401k plan own 50% of a property and myself as an individual own the other 50%?  My hunch is this is also a no no because I can't imagine the nightmare in the accounting.

Jeff Astor · Answer

As the others said, its a PT. However, some companies offer Solo 401ks with a loan feature, which in short means you can take out up to $50k of the account and use that money as regular monies not subject to the rules of PTs. Also, at least one of the leading providers of Solo 401ks can help you set one up A-Z in a few days.

Bill Exeter · Answer

No, this would be a prohibited transaction.  You can not "self-deal" between you and your retirement account.

Sam Leon · Answer

OK, scratch that idea.

In order to get the cash funds to do it, I have to sell some stocks.  I don't want to sell now and be subjected to short term capital gains tax on that...I wish there is a 1031 exchange from stock to real estate hahaha...oh well.

I might have to just finance this one.

Can I buy a property with cash or have it financed, then sell it to my SDIRA or Solo-401K plan?

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