Fund Real Estate Operating Company Using a ROBS 401k

QUESTION:

Can I invest a 401k in real estate?

ANSWERS:

1) One threshold issue is whether your objective is really to invest your retirement funds in real estate. If that is the case, you can achieve this via the solo 401k as a 401k plan allows for investing in real estate. This would be done via the solo 401k rather than via the ROBS 401k funded C-corporation where the proceeds of the real estate investing would flow back to the 401k and grow on a tax-deferred basis. There are certain limitations that would apply including that you would not be able to work on the properties (e.g., no "sweat equity"), all income and expenses would flow in and out of the solo 401k account, no personal use of the property, etc. For more on investing in real estate via your solo 401k CLICK HERE. 

2) If your objective is to invest in real estate via a ROBS 401k funded Corporation, there is an important consideration from a 401k Business Financing perspective. Namely, the C-corporation must be an operating company. While there are multiple ways to qualify as an operating company, the mot common is to provide goods or services. If the C-corporation will now start investing in real estate, one issue is whether this will constitute the primary activity of the business. In that case, the C-corporation would need to do so as real estate operating company. In order to qualify as a real estate operating company, the C-corporation must satisfy the following requirements:

Real Estate Operating Company

1) The corporation that you invest your retirement funds through the ROBS 401k in may invest in real estate that satisfies the following requirements:

a. At least 50 percent of the assets of the business, valued at cost, must be invested in real estate which is managed or developed and with respect to which such entity has the right to substantially participate directly in the management or development activities.

b. Such entity in the ordinary course of its business must be engaged directly in real estate management or development activities.

2) Expenses related to the real estate will be paid by the corporation.

3) The real estate will not be used for personal use.

4) There may be periods of time when the 50% test described in 1(a) above is not satisfied. This confirms that it would be acceptable as long as the 50% test is satisfied on the following dates: (i) the "initial valuation date" or the first date on which the corporation makes an investment that is not a short-term investment of funds pending long-term commitment; and (ii) at least one day during each annual valuation period. An “annual valuation period” is an annually recurring period of not more than 90 days that begins no later than the anniversary of an entity’s initial valuation date. For example, if the corporation’s first long-term investment is made on October 3, 2015, that date is its initial valuation date. The first annual valuation period can commence as late as October 3, 2016. An annual valuation period that commences on October 3, 2016 would end on December 31, 2016 and recur each October 3 through December 31 thereafter. Once an annual valuation period is established it may not be changed except for good cause.

To learn more about the ROBS 401k, VISIT HERE: