Solo 401K real estate in Kind distribution

[Adam A.]

Greetings tax experts,

I've had my Solo 401k Trust for about 4 years now which grew very fast buying rental properties. I also have other properties not in this trust. Now, I'm at a crossroad of selling my sponsored LLC and retire at 59 1/2 living on passive rental income the properties in both the trust and non-trust.

I'm thinking about in kind distribution at 59 1/2 due to the fact that the properties in the Solo 401K will be appraised a lot lower than when I'm 70 1/2.

• My question, when I take the in kind distribution and transfer the properties from the solo trust to myself, do I pay taxes on ALL the combined: 1)the rental income of the transferred properties from the trust. AND 2) the difference in appreciation of the properties when I bought them in the trust. AND 3) Rental income from the non-trust properties? 

Is there a method to reduce paying the tax burden all in 1 year at 59 1/2?

 Thank you in advance.

Adam Atassi

[Dmitriy Fomichenko]

@Adam A.

If you take property from your Solo 401k via "in-kind distribution" you would have to appraise the property by independent third party appraisal and the value of the property will be taxable amount. Your 401k plan would be required to issue form 1099-R with that amount reporting this income to you and copy to the IRS.

The rental income that the property would generate from this point forward will be considered your personal income, but you now can take advantage of depreciation deduction and minimize your tax liability on this rental income. All rental income that you received on this property prior to distribution still stays in your 401k. If you distribute that cash out - that would also be taxable. The bottom line is that you only pay taxes on the amount of distribution. The rest of the balance of your 401k continues to grow tax-deferred. Be sure to bring your CPA into this discussion.