A 401(k) investment account is flexible enough to acquire and hold investment grade real estate as part of your retirement plan. Self Employed business owners with a 401(k) or Employees with an employer sponsored 401(k)retirement account may transfer those assets to a SEP IRA which will also allow plan proceeds to be invested in real estate.
Before making any transfers consult the plan administrator to make sure the transfer will not break the qualified status of the plan. The process is quite simple:
1. Discuss your intentions to invest in real estate with your plan administrator and they will assist in the paperwork. Specifically discuss Sec 512 and 514 with the administrator relating to unrelated business taxable income. When borrowing, the plan can also become subject to Unrelated Business Taxable Income or UBTI in the year in which the income was generated. This would be accomplished by filing a 990T with the current year tax return.
2. Locate a lender that specializes in non-recourse loans, your local residential lender will not do, it must be a specialist. Any loan made to a qualified retirement plan must be a non-recourse loan. This loan type can only attach collateral to the asset and not to the borrower. In short, if the loan goes bad the lender can only take the property as the security and not come after the retirement plan for the deficiency. Expect to pay higher than market residential rates and fees for this loan.
3. Seek out a reliable real estate broker that will assist in locating a suitable real estate investment. This individual should gladly show the portfolio of real estate investments that they hold. If they do not have a portfolio look for another agent.
If the plan has sufficient assets to make a cash purchase this can eliminate the need for financing. When investing plan proceeds it will be necessary to avoid prohibited transactions as defined by the IRS(which are many). It is also possible to create a partnership, for purposes of acquiring real estate, with your retirement account wherein the plan holds a certain percentage of ownership and a natural person or corporation own the other percentage. If the plan lacks the assets to purchase a property it is possible to have two or more qualified plans acquire title in an as contributed percent divided interest.
Each interest can be sold, traded or bartered as needed. Another strategy, could be in a commercial application to have the retirement plan acquire the site (land) and agree to sign a 99 year land lease for a building to be constructed that would generate income to the plan through rents(Many hotels use this method of acquisition). To avoid UBTI, the rents should not be based on the performance of the business leasing the land. Employing such a strategy would allow the depreciation on the building to offset income generated from the ventures of the building itself by the owner of the building.
The simplest of investments would not involve loans, build outs or the plan's beneficiary using the investment assets of the plan, say a building with offices occupied by the plan beneficiary, or derive income from the assets of the plan such as a building contractor using proceeds to fund materials or buy equipment.
The use of a 401(k) or SEP IRA for investment purposes can be financially rewarding and profitable. Seek the advice of reliable tax professionals before embarking on any venture. dbrown
A 401(k) investment account is flexible enough to acquire and hold investment grade real estate as part of your retirement plan. Self Employed business owners with a 401(k) or Employees with an employer sponsored 401(k)retirement account may transfer those assets to a SEP IRA which will also allow plan proceeds to be invested in real estate.
Before making any transfers consult the plan administrator to make sure the transfer will not break the qualified status of the plan. The process is quite simple:
1. Discuss your intentions to invest in real estate with your plan administrator and they will assist in the paperwork. Specifically discuss Sec 512 and 514 with the administrator relating to unrelated business taxable income. When borrowing, the plan can also become subject to Unrelated Business Taxable Income or UBTI in the year in which the income was generated. This would be accomplished by filing a 990T with the current year tax return.
2. Locate a lender that specializes in non-recourse loans, your local residential lender will not do, it must be a specialist. Any loan made to a qualified retirement plan must be a non-recourse loan. This loan type can only attach collateral to the asset and not to the borrower. In short, if the loan goes bad the lender can only take the property as the security and not come after the retirement plan for the deficiency. Expect to pay higher than market residential rates and fees for this loan.
3. Seek out a reliable real estate broker that will assist in locating a suitable real estate investment. This individual should gladly show the portfolio of real estate investments that they hold. If they do not have a portfolio look for another agent.
If the plan has sufficient assets to make a cash purchase this can eliminate the need for financing. When investing plan proceeds it will be necessary to avoid prohibited transactions as defined by the IRS(which are many). It is also possible to create a partnership, for purposes of acquiring real estate, with your retirement account wherein the plan holds a certain percentage of ownership and a natural person or corporation own the other percentage. If the plan lacks the assets to purchase a property it is possible to have two or more qualified plans acquire title in an as contributed percent divided interest.
Each interest can be sold, traded or bartered as needed. Another strategy, could be in a commercial application to have the retirement plan acquire the site (land) and agree to sign a 99 year land lease for a building to be constructed that would generate income to the plan through rents(Many hotels use this method of acquisition). To avoid UBTI, the rents should not be based on the performance of the business leasing the land. Employing such a strategy would allow the depreciation on the building to offset income generated from the ventures of the building itself by the owner of the building.
The simplest of investments would not involve loans, build outs or the plan's beneficiary using the investment assets of the plan, say a building with offices occupied by the plan beneficiary, or derive income from the assets of the plan such as a building contractor using proceeds to fund materials or buy equipment.
The use of a 401(k) or SEP IRA for investment purposes can be financially rewarding and profitable. Seek the advice of reliable tax professionals before embarking on any venture. dbrown