You are "able" to do anything you want with your 401(k), but you do have to adhere to the rules outlined by the tax code. 

I'll outline the exit strategies and division of profit/loss options below.

If you are planning any of the transactions outlined above, I highly recommend you contact a professional such as an attorney who can ensure that the structure is set up correctly. 

I’d proceed as outlined above.

The owner said that it has been mis-managed by a property management team who was new and were not able to successfully stabilize the occupants and it has been at 50% for longer than the projections and business plan outlined.

Many of the same reasons you outlined are why I have been intrigued by GC in particular.

@Ashley Abramson this should be (or should have been) included in the original partnership agreement with other unforeseen items like death of a partner, divorce etc. if it is not outlined int the original operating agreement, then you should contact an attorney.

Best of luck to all of you :) I love how you outlined your thought process!! 

In my last post I discussed using Fannie Mae's delayed financing exception to allow for pulling the cash back out before the typical 6 month seasoning period, and in the comments @Steve C. led me to a post outlining a different approach using a LLC-to-personal loan (see https://www.biggerpockets.com/forums/48/topics/460294-how-to-cash-out-1-4-unit-property).

Jonathan has a good outline, but if there is no smoking or pets, I would add that.