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How to Invest in Real Estate Through Your Solo 401k

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Real estate has long been heralded as a stable, tangible, and potentially lucrative investment avenue. For self-employed professionals or those who have chosen the path of small entrepreneurship, the Solo 401k stands as a versatile retirement savings plan. 

But what happens when these two domains intersect? Can a Solo 401k be leveraged to step into the real estate market? Let’s navigate this intricate landscape, focusing on the potential rewards and inherent challenges.

Understanding the Unique Perks of a Solo 401k for Real Estate Investment

To comprehend the appeal of this union, it’s essential to appreciate the inherent flexibility the Solo 401k brings to the investment table.

Solo 401k Investment Landscape

Solo 401ks are not confined merely to stocks or bonds. The IRS permits these plans to hold a broader range of assets, of which real estate is a prominent contender. This opens the door to direct real estate investments, potentially diversifying your retirement portfolio meaningfully.

Beyond just the traditional residential or commercial properties, Solo 401k holders can venture into various real estate sub-segments like raw land, multifamily units, or even real estate syndications, offering a broader scope for portfolio diversification.

Checkbook Control Advantage

Often, Solo 401k plans come with what is known as “checkbook control.” This feature empowers plan holders to make quick investment decisions, an asset in the dynamic world of real estate where timely acquisitions can make a significant difference.

With checkbook control, you have direct access to your 401k funds through a checking account, minimizing bureaucratic delays. It streamlines property management activities like paying for repairs, collecting rents, or managing other property-related expenses.

The Potential Pitfalls: Rules & Restrictions

Real Estate

Real estate investment through a Solo 401k is not without its complexities. It’s crucial to steer clear of potential missteps to ensure IRS compliance and protect the tax-advantaged status of your account.

Prohibited Transactions

The IRS delineates specific transactions that are off-limits for Solo 401k investments. Engaging in these can jeopardize the tax benefits of your plan.

For instance, you cannot purchase a property for personal use with your Solo 401k funds. Similarly, transactions involving “disqualified persons” – like your spouse, lineal ascendants or descendants, and their spouses – are typically prohibited. This means you can’t buy a property a close family member owns using your Solo 401k.


Unrelated Debt-Financed Income (UDFI) and Unrelated Business Taxable Income (UBTI) are tax implications that can arise when using leveraged money (like a mortgage) for real estate purchases within a Solo 401k.

If your Solo 401k borrows money to invest in real estate, a portion of the income generated might be subject to UDFI, which can be taxed under UBTI rules. Being aware of these implications is crucial for informed investment strategies.

Financing Real Estate: The Leverage Question

While investing in real estate through a Solo 401k is promising, how you finance the purchase is a pivotal consideration.

Using Non-recourse Loans

You must use non-recourse financing if you’re considering borrowing to finance a portion of the real estate purchase within your Solo 401k. A non-recourse loan is distinct in that the lender’s only recourse, should you default, is the property itself and not any other assets within the 401k or your personal holdings.

This type of loan ensures that the integrity and protection of the retirement fund remain uncompromised. However, securing non-recourse loans can sometimes be challenging, with potentially higher interest rates and sizeable down payments.

Cash Purchases

An outright cash purchase is another avenue, utilizing the accumulated funds in your Solo 401k. It eliminates the intricacies of UDFI and offers an unencumbered ownership of the property.

Though straightforward, this approach requires substantial accumulated funds and may tie up a significant portion of your 401k in one asset, influencing your portfolio’s liquidity and diversification.

Managing and Maintaining the Property

Real Estate

Once the property is within your Solo 401k portfolio, its management requires careful handling to maintain the tax-advantaged status of the investment.

Direct Property Management

As the Solo 401k plan holder, you can manage the property directly. This includes choosing tenants, setting rents, and making critical decisions. However, it’s crucial to remember that any income generated – be it rent or capital appreciation – should return directly to the Solo 401k account, maintaining the tax-deferred nature of the revenue.

Third-party Property Management

Engaging a third-party property manager can be an advantageous strategy, especially if direct management becomes cumbersome or if you wish to maintain an arm’s length relationship with the property.

While this involves management fees, it offers a more hands-off approach, ensuring professional oversight and potentially avoiding inadvertent prohibited transactions.

Exit Strategy: Selling and Distributing

The eventual sale of the property and the distribution strategy can influence your overall returns.

Selling Within the 401k

The proceeds should return to the Solo 401k upon selling the property to retain their tax-advantaged status. This ensures that any capital gains from the sale aren’t immediately taxable and instead grow tax-deferred within the retirement account.


When it’s time to take distributions in retirement, the normal Solo 401k rules apply. If the property is still held within the 401k at this time, it’s possible to distribute the property “in kind,” effectively transferring the property title from the 401k to the individual. Such a distribution would be subject to regular taxation.

Prohibited Transactions and Disqualified Persons

REal Estate

Navigating the complex landscape of what’s allowed and what’s not is vital for Solo 401k real estate investors. Making a wrong move can jeopardize the tax-advantaged status of your investment.

Prohibited Transactions

Investing in real estate through a Solo 401k brings its own set of rules to ensure the account’s tax benefits remain intact. Actions such as personally using the property, even temporarily, or paying for property-related expenses out-of-pocket can be seen as prohibited transactions. The consequences of such mistakes can be severe, leading to taxes and penalties.

Disqualified Persons

The IRS identifies certain individuals or entities as “disqualified” when it comes to Solo 401k transactions. This includes the account holder, certain family members, and any entities controlled by such individuals. 

For example, renting the property to a child or a parent would be considered a prohibited transaction. Ensuring strict boundaries between the Solo 401k and disqualified persons is essential for the compliant investment management.

Potential Pitfalls and Challenges

While investing in real estate through a Solo 401k is advantageous, there are challenges one must be prepared for.


Real estate is fundamentally a less liquid asset compared to stocks or bonds. This can tie up a significant portion of your 401k funds in a single investment, which may not be easily convertible to cash if required.

Maintenance Costs

Real properties incur regular expenses — maintenance, property taxes, insurance, and possible homeowner association (HOA) fees. Ensure your Solo 401k has sufficient liquid assets to cover these ongoing costs without resorting to prohibited transactions.

Market Risks

Like any investment, real estate is subject to market fluctuations. Economic downturns, changes in neighborhood dynamics, or broader property market declines can influence the value of your investment. Diversification remains essential to mitigate these risks.

Wrap Up

Investing in real estate through your Solo 401k offers a unique avenue for diversification, potentially attractive returns, and tax benefits. However, it’s not without its complexities. It requires a meticulous understanding of the rules, strategic planning, and, often, the counsel of financial or tax professionals.

The potential to grow your retirement funds in tangible, income-generating assets is enticing. But, as with any significant financial decision, it’s essential to be armed with knowledge and to proceed with caution. By understanding the intricacies of using Solo 401k funds for real estate investment, you place yourself in a better position to harness the benefits while sidestepping the pitfalls.

Remember, the ultimate goal is to build a robust, diversified retirement portfolio that aligns with your long-term aspirations. Real estate, when integrated thoughtfully within a Solo 401k, can be a pivotal component in realizing this vision.

5 Responses

  1. Great information! I have a couple questions:

    1. I have both a ROTH Solo IRA and Roth Solo 401K. Do these rules apply to both of these accounts?

    2. If you buy an investment property are you allowed to stay in it at all? Are there like a limited number of days a year? Or, not at all?

    3. Do these rules apply when buying properties internationally? I’m thinking of maybe buying in Portugal and/or Mexico? Can I use money from these accounts to do that?

    4. Is there anyway to use the money to buy a property you live in more permanently?

    Thank you!

    1. Great question, Christine!

      1. Yes, the rules apply to both a Roth IRA and a Roth Solo 401k
      2. You cannot stay in an investment property (even one night) if your retirement plan owns the property. Do not stay in the property at all.
      3. You can buy international properties using retirement funds, but the rules remain the same in that you cannot stay in the property ever while the retirement plan is the owner.
      4. There isn’t a way to use 401k or IRA funds to buy a property you live in personally. You could use the retirement funds to buy the property, but you would then need to distribute the asset (and pay any taxes or penalties) once you want to live in the home. In other words, the retirement account can buy the property, but you’d end up paying taxes and any applicable penalties as soon as you make the home “yours”.

  2. So with a solo 401k real estate investment you would be making mortgage, property tax, insurance and maintenance expense payments all from the solo 401k money market balance by way of checkbook control. Any rent income would deposit back into that same brokerage account. To avoid “prohibited transactions”, ie paying for real estate expenses with funds other than solo 401k balances, you would have to have a substantial balance in solo 401k account to begin with…..enough to secure financing, down payment and to make all expenditure payments (property tax, insurance, maintenance etc…). Seems a bit risky

  3. I have a question, can a solo 401k invest in an LLC which owns real estate that you reside in at any point?

    1. Great question, Steve and unfortunately the answer is NO! Do not reside in any properties owned by your Solo 401k, or 401k LLC, or IRA, or IRA LLC. This is a prohibited transaction!

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