Solo 401K and Flipping: Specific questions regarding commissions and possible self dealing

[Robert Pickles]

Hi All,

Very new to this forum and so far am very impressed. If what I'm asking has already been answered (I can't believe it hasn't) please direct me to the appropriate post. I've tried searching but I can't seem to get the right search terms to generate the results I want.

Background: I'm a real estate agent in Virginia. I have a previous employer based 401K that I will be moving into some form of self directed structure, possibly a Solo 401K. I'm researching allowed/prohibited transactions, and custodians now (thanks for all the good threads here on that). I have friends here (also agents/brokers) that are using a local custodian here, but from what I've learned so far I think they are doing things that if audited would cause them some grief. Trouble is, so many plan providers are giving contradictory advice and I can't seem to understand what parts of the IRS code apply to each version of a plan, or how to interpret them if I did. . .

1) Agent John, acts as the buyer broker for an investment property to be acquired by his retirement plan. The plan funds the transaction, the property is properly titled and John earns a standard commission which he puts in his "personal" RE business. Seems like that is a prohibited dealing, but the plan provider assures John it isn't. (I meet this plan provider Monday).

2) Agent John, now acts as the listing agent for the newly renovated property. The plan sells the property using John's service, and now John earns a commission on the listing site, and again, that commission goes into his personal RE business account.

3) Agent John, is a hands on guy and a work-aholic so he oversees the entire project and manages the contractors, and he and his wife do their own finish work. They paint, install light plumbing fixtures, clean . . . Contractors are not disqualified individuals. The work that John and his wife do are NOT expensed back to the plan, but somehow they pay for the stuff, not sure if it comes out of their pocked un-reimbursed, or if the plan cuts checks to local suppliers. Can John manage the renovation by managing the contractors, and can John and his wife work for free. This seems to me a prohibited dealing.

4) Agent Sally, is buying VA Vendee properties, which are initially titled in her name. Later (30,60,90) days - she re-titles the property to "custodian .... for behalf of Sally". This seems wrong on so many levels from what I've learned. One, the bank could call the loan due when it learns the property has been transferred into a plan. Two, how in the world can she transfer property that "she" owns into the plan? Three, now the plan has property that is financed, does this open up the UBIT stuff?

These are not made up things, my associates are doing these things right now. I want to put my RE knowledge and connections to work, and I have enough money in my retirement to get started, but I want to do it right.

Again, feel free to point me to threads that have already dealt with this or help me learn to use the search tool better if these specific questions have already been answered.

Thanks in advance,

[Jon Holdman]

IMHO 1, 2, and 4 are prohibited transactions. Item 3 isn't a prohibited transaction, but it is a contribution.

1 and 2 clearly are because the qualified plan (Agent John's plan, I assume) is doing a transaction that personally benefits John. Its my understanding that this might be OK, if permission was requested from the proper agency (the department of labor, IIRC.) It would be justified on the basis that the commissions were the same as if the plan was paying the commissions to any other agent. I've not tried this, but I have read discussions about this sort of thing.

3 is a contribution. John is contributing his labor to the property. You just cannot do this with a property your qualified plan owns.

4 is clearly a prohibited transaction. Sally is buying a property. She then transfer's ownership of the property to her qualified plan.