I flipped two houses under my Solo 401k Trust

QUESTION: 

I flipped two houses under my Solo 401k Trust. Would I need to fill out any IRS forms for the activities - even though none of the proceeds are taxed?

ANSWER:

That is a very good and tough question. Reason being, while a solo 401k can be invested in real estate and the profits generally grow tax deferred, when a solo 401k invests in homes that are "flipped" the IRS may view it as an active business activity and thus it will subject the solo 401k to a tax known as unrelated business income tax (UBIT). As a result, any profits over 1,000 will be subject to this tax.

What makes this a tough question, in my opinion, is that the IRS has not published whether this rule only applies to a certain number of properties flipped in a year or any property that is flipped.

Therefore, the conservative approach would be for the solo 401k to pay the UBIT on any property flipped inside the solo 401k plan.

The tax form that you would need to prepare with your accountants assistance is Form 990T. See following for more information.

https://www.irs.gov/uac/Form-990-T,-Exempt-Organization-Business-Income-Tax-Return

https://www.irs.gov/instructions/i990t/

https://www.irs.gov/Charities-&-Non-Profits/Unrelated-Business-Income-Tax

Possible Alternative

For those who want to flip real estate inside their retirement account without subjecting the retirement account to unrelated business income tax (UBIT), the ROBS 401k may be a viable option as UBIT does not apply to a ROBS.

To learn more about the solo 401k plan VISIT HERE, and to learn more about the ROBS 401k CLICK HERE.