Another question about Solo 401K funds.

[Michael Martin]

Hello all! I'm new to the forums and to the idea of real estate investing. I've been doing some research lately on the process of flipping houses and I'm intrigued by it all. I've also learned about using a Solo 401K to fund these purchases and I have a couple of questions about how that works.

My situation is this: I'm retired and have my nest-egg in a traditional IRA. I have an ecommerce retail business, set up under an LLC, that's been operating now for a couple of years plus. It's not successful monetarily, but it's given me some tax deductions. My living expenses are covered by pension, Social Security and IRA withdrawals.

Question #1: Can I use this existing business as my self-employment qualifier for setting up the Solo 401K?

Question #2: If I use funds from my Solo 401K (transferred from IRA) to purchase property that needs to be rehabbed and then flipped, can I also use those funds for the fixed expenses (closings, mortgage payments, etc.) and the rehab costs? If so, are those disbursements tax-deferred provided they are reimbursed to the 401K? Thanks.

[George Blower]

@Michael Martin

First welcome to Bigger Pockets.

1. In order to open a solo 401(k) plan, you need to be pursuing self-employment activity. In your situation you have obviously been performing such activity for a couple years. 

Generally, depending on facts and circumstances, in order to continue with the solo 401(k) plan you will need to continue to perform self-employment activity. You also want to make sure the business activity you are performing does not fall under a hobby business.  A hobby business does not qualify as self-employment activity with respect to participating in a a solo 401(k).

https://www.irs.gov/newsroom/hobby-or-business-irs...

2. Yes the Traditional IRA can be transferred to a Solo 401(k) plan and then invested in real estate. Because the property will be owned by the Solo 401(k) plan, just funds the solo 401k plan funds can be use to improve the property and to cover expenses such as property taxes, for example.

On another note, you want to make sure that the activity done inside the solo401(k) plan does not trigger unrelated business income tax (UBTI) which could be triggered if property is being flipped inside the solo 401(k) plan. You can generally get away with flipping maybe 1 (one) to 2 (two) properties inside the solo 401(k) plan; however, it generally comes down to how often you are flipping real estate inside the Solo 401(k) plan. The view of the government is that retirement plan such as a solo 401(k) plan is to invest in passive investments such as buy-and-hold real estate (e.g., rentals).