Posted almost 8 years ago

Partial or Full In-kind Distribution of Real Estate from Solo 401k

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SCENARIO & QUESTION:

The research that I have done, indicates that I have the option of withdrawing Real Estate held in my Solo 401K trust as a distribution.

The details are as follows: My Solo 401K Trust holds title to a single parcel of real estate that was purchased a couple of years ago. I may be retiring in a year or two and am interested in becoming the owner of the real estate parcel. I believe that I can take partial distributions over 2 to 3 years, becoming a joint owner at first, and then continuing taking distributions until becoming the sole owner of the parcel. As I understand, I would have to have the property appraised first to determine its market value, then take a single distribution at that value or multiple distributions over multiple years which would total that same value.

I am aware that, if I take multiple distributions over multiple years, then, as a joint owner, I would be splitting all the expenses needed to maintain the property with the Solo 401K Trust. And the “split” would be the same ratio as the joint ownership. Such as, if the property were appraised at $50,000 and I took a $25,000 distribution the first year, then my share of the expenses to maintain the property (property taxes and such) would be 50% during that first year.

Does this all make sense and is it possible to do?

Not that it matters, but the parcel is a vacant lake front property, that I purchased through my solo 401k in late 2015. At the time of purchase I was not sure if I just wanted it as an investment or may want to be sole owner of it at some future time. I believe that I may like to make personal use of the property in the future and need to know the proper procedure to do so.

ANSWER:

Your understanding is correct.

1. One is not required to take solo 401k distributions in the form of cash. Therefore, an in-kind distribution of an asset is allowed, provided the following solo 401k distribution rules are satisfied:

If you are over age 59 1/2, you can distribute any amounts.

If you are not over age 59 1/2, you can generally only distribute any amounts that were transferred/rolled over to the solo 401k from other retirement plans and/or IRAs.

2. When processing an in-kind distribution (partial or full) of a solo 401k owned asset such as real estate, the property will need to be appraised by a third-party (not the solo 401k trustee) so that the correct amount is reported as a distribution.

3. Whether a partial or full in-kind distribution of real estate, the solo 401k distribution needs to be reported to the IRS on Form 1099-R by the solo 401k provider, and the 20% mandatory tax withholding applies.Click hereto learn more about this.

4. If a partial in-kind distribution of real estate, that portion is assigned from the solo 401k in the name of the solo 401k participant.

5. If a full in-kind distribution of real estate, the entire asset is assigned from the solo 401k to the solo 401k participant.

6. If a partial in-kind distribution of real estate, the solo 401k owner/participant still cannot use or live in the property because it is still partially owned by her solo 401k plan.

7. When the real estate property is owned by both the solo 401k and the participant, all income and expenses have to be divided based on the ownership percentages.

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