Real Estate Solo 401k In-Kind Distribution Rules and Reporting

While solo 401k distributions are not mandatory until the solo 401k owner reaches age 70 1/2 (the technical IRS lingo is Required Minimum Distributions), it is not well known that solo 401k distributions can also be made in the form of a hard asset (for example,  real-estate) instead of cash.  In other words, instead of receiving a cash distribution, part of the real-estate holding is distributed in-kind to the solo 401k owner and taxes paid on the value of the property that is distributed. As a result, the solo 401k owner ends up personally owning part of the real-estate holding over time as the in-kind distributions continue.   

Items to go keep in-mind when taking in-kind distributions of real-estate from a solo 401k. 

1. A triggering event is required: Generally, the solo 401k owner must reach age 59 1/2 or cease self-employment in order to make solo 401k distributions. 

2. Age 70 1/2 Solo 401k required minimum distribution: Whether the solo 401k owner wants to, he or she is required to start making distributions once he or she reaches age 70 1/2. Why? Well, Uncle Sam needs to start collecting tax revenue from your solo 401k.

3. Assignment of real-estate property (for example, a house) to the solo 401k owner: When a partial solo 401k distribution is made to the solo 401k owner in the form of real restate, part of the property is assigned in-kind to the solo 401k owner; however, the property first must be appraised by a third-party valuation provider not the solo 401k owner in order to determine the value that the solo 401k owner will need to pay taxes on. It is imperative that an independent third-party values the real property to demonstrate to the IRS that taxes were paid on the correct value not a deflated value because the IRS wants to collect its due tax revenue.

4. Titling the real-estate property after the in-kind distribution: The property deed must be recorded to list the solo 401k owner and the solo 401k as the new owners. The new ownership percentages will be based on the third-party valuation as well as the in-kind distribution amount.

For example: Let's say that Nolan Ryan is self-employed, has reached the magical age of 701/2 (see item 2 above) so is required to start making required minimum distributions (RMDs) from his solo 401k , his solo 401k owns a 5 bedroom house in Houston, TX, and he decides to satisfy his RMD by processing a partial in-kind solo 401k distribution of the solo 401k owned house.  Next, in order to satisfy the IRS rules, he gets the property appraised by a third-party valuation professional who values the house at $300,000. Subsequently, Nolan Ryan has his run a calculation to determine his RMD and the calculation requires that he must take a distribution of $18,400.00. Therefore, after the distribution, the property deed will need to be recorded to show that Nolan Ryan now personally owns 6% of the property and his solo 401k owns the remaining 94%. Finally, the solo 401k provider will issue a 1099R to report the in-kind distribution.

5. A Form 1099R still applies: To report the real estate in-kind distribution from the solo 401k to the IRS, a Form 1099R must be issued by January of the year following the in-kind distribution.

6. Paying expenses when a real-estate asset is co-owned by the 401k owner and his or her solo 401k: After the partial in-kind distribution of real estate from the solo 401k to the solo 401k owner has been processed, expenses in connection with the real-estate asset will still continue; however, instead of only using solo 401k funds to pay the expenses (e.g., property taxes, repair costs, etc.), these expenses are now shared by the solo 401k owner and the solo 401k based on the new ownership percentages. 

To learn more about the solo 401k distribution rules, click on DISTRIBUTIONS.