Solo 401k Real Estate Guide: Can You Buy a House Without Penalties?

Introduction: Real Estate + Retirement? Why It’s a Hot Question Now

Can you use a retirement account to invest in property? If you’re self-employed, the answer is yes. And the solo 401k real estate strategy is gaining serious traction.

Entrepreneurs, freelancers, and small business owners are increasingly looking beyond traditional stocks and bonds. They want assets they can understand. Assets like real estate. And thanks to the flexibility of the solo 401k, they’re finally able to make it happen.

But here’s the catch: the IRS has strict rules. If you’re thinking about using your solo 401k real estate plan to buy property, you need to understand what’s allowed, and what’s not. One wrong move could trigger penalties, taxes, or worse, a disqualified plan.

This guide breaks down everything you need to know. From the difference between buying a rental property and your personal home, to 401k loan options, UBIT taxes, and smart setup strategies. We’ll cover all the essentials to help you make informed moves with your retirement funds.

Can You Buy a House With a Solo 401k?

Short answer? Yes, but only if you follow the rules.

The solo 401k real estate strategy allows you to purchase property using retirement funds, but only for investment purposes. You cannot buy a house for yourself to live in. The IRS strictly forbids personal benefit from assets owned by your retirement plan.

That means:

• No vacation homes.
• No primary residences.
• No housing your relatives.

Instead, your solo 401k can purchase rental property, raw land, commercial buildings, or even real estate notes. As long as they’re held exclusively as investments. All income from the property must flow back into the solo 401k. And all expenses must be paid from the plan as well.

The IRS also warns against “prohibited transactions,” which include using the property personally or dealing with “disqualified persons” like your spouse, children, or parents. Violating these rules can result in immediate taxation and penalties on your entire 401k balance.

Another factor to understand is UBIT. If your solo 401k real estate deal involves financing (like a non-recourse loan), it may trigger UBIT on the portion of the income tied to the debt. We’ll break this down more in the next section.

So yes, you can absolutely buy property with your solo 401k. But only if the property is treated purely as an investment and handled through a compliant structure.

Solo 401k Real Estate Rules: What the IRS Allows (and Forbids)

Using a solo 401k for real estate investing gives you a powerful tool, but only if you play by the rules. The IRS outlines very specific restrictions designed to prevent misuse of retirement funds.

What’s Allowed:

• Purchasing investment property (residential, commercial, land).
• Holding rental properties that generate tax-deferred or tax-free income.
• Using non-recourse financing for leveraged purchases (with UBIT considerations).
• Partnering with other investors (as long as you follow ownership rules).

What’s Not Allowed:

• Self-dealing: You can’t buy a property from yourself, your business, or anyone in your immediate family.
• Personal benefit: You can’t use the property in any personal way — even for a weekend.
• Primary residence use: Your solo 401k real estate plan cannot include the home you live in, or plan to live in. Ever.

Who Are “Disqualified Persons”?

According to IRS rules, you (the account holder), your spouse, children, grandchildren, parents, and certain business entities you control are all considered “disqualified.” That means they can’t live in, sell to, or benefit from the property in any way.

Violating this rule = prohibited transaction = your entire solo 401k could become taxable.

What Is UBIT?

If your solo 401k real estate investment is purchased using financing, the income generated from the financed portion is subject to Unrelated Business Income Tax (UBIT). This tax applies because retirement plans are normally tax-deferred — and using debt is seen as a “business activity.”

Here’s the nuance:

• If you pay for the property in full using only solo 401k funds — no UBIT.
• If you use a non-recourse loan, UBIT may apply to a portion of the rental income or gains based on the debt ratio.

It’s complex, but manageable with the right plan provider and tax strategy.

In short, the solo 401k real estate route is completely legal, and extremely powerful. As long as you understand and respect the IRS rules around ownership, use, and financing.

How to Buy Investment Property With a Solo 401k

Buying real estate through a solo 401k isn’t complicated, but it does need to be done right. Here’s how the process typically works.

1. Set up a self-directed solo 401k with checkbook control.

This version of the plan gives you direct access to your funds. No waiting on custodial approval for every transaction. You’ll act as the trustee, making fast investment decisions on your own.

2. Open a solo 401k bank account.

The account must be in the name of your solo 401k trust. Use the plan’s EIN, not your personal Social Security number. This is where you’ll deposit contributions and from where you’ll make real estate purchases.

3. Use your solo 401k funds to buy the property.

Whether it’s a rental home, a piece of land, or a commercial building, the purchase must be made in the name of the solo 401k. Not in your personal name. All contracts, titles, and documentation must reflect the 401k as the buyer.

4. Income and expenses stay inside the plan.

Rental income goes back into the solo 401k account. Repairs, taxes, and maintenance must also be paid from that same account. You can’t pay out of pocket or deposit income into your personal bank.

5. No personal benefit. Ever.

The property is an asset of your retirement plan. That means you, your family, and your business can’t use it. You can’t live there. Can’t vacation there. Can’t fix it up yourself. Every dollar and decision must benefit the retirement plan, not you personally.

Done properly, this creates a powerful vehicle for long-term, tax-advantaged real estate growth inside your solo 401k.

Using a Solo 401k Loan to Buy a Home

While you can’t live in a house owned by your solo 401k, you can borrow from the plan to buy a personal residence—if your plan has a loan provision.

Here’s how it works.

You’re borrowing from your retirement, not withdrawing. So there are no taxes or penalties as long as you repay the loan on time. The IRS allows you to borrow up to 50% of your account balance, maxing out at $50,000.

Loan terms:

• Up to 5 years for general purposes
• Up to 15 years if the loan is used to buy a primary residence

There’s no credit check. No bank approval. Just an agreement between you and your retirement plan. And you’ll repay the loan (plus interest) back into your own account.

The upsides:

• Access funds for a home without early withdrawal penalties
• Keep interest payments “in the family” (they go back to your plan)
• Simple setup and fast access

But there are tradeoffs.

• If you default, the loan becomes a taxable distribution
• You miss out on potential gains those funds could have earned in the market
• For expensive markets, $50K might not be enough for a down payment

A solo 401k loan can be a solid solution for a down payment or emergency purchase. Just make sure you have a clear repayment plan and a backup fund in case your income fluctuates.

Hardship Withdrawals and Solo 401k Real Estate Purchases

Thinking about taking a hardship withdrawal from your solo 401k to buy a house? Think again. It’s not like a traditional 401k.

Hardship withdrawals are rarely an option in solo 401k plans. They’re designed for business owners, and the IRS doesn’t typically view a home purchase as a hardship in that context.

Compare that to traditional 401k plans offered by employers. Some of those plans allow hardship withdrawals for specific reasons. Buying a first home is sometimes on that list. Same goes for traditional IRAs, which allow up to $10,000 in penalty-free withdrawals for first-time homebuyers.

But with a solo 401k, you likely won’t have that same access.

So what’s the better option?

A solo 401k loan, if your plan allows it. It gives you access to up to $50,000 without triggering taxes or penalties. Just remember: you’ll need to repay it on time to keep it from becoming a taxable event.

Bottom line: Hardship withdrawals are limited, risky, and usually not worth it. If you’re planning to buy a home and need access to retirement funds, a loan is almost always the smarter route.

Solo 401k vs. IRA for Real Estate Investing

When it comes to buying property inside a retirement account, both a solo 401k and a self-directed IRA offer access to alternative assets. But the solo 401k real estate route offers several clear advantages.

Solo 401k benefits:

• Built-in loan feature for personal home purchases.
• No need for custodian approval. Investors with checkbook control can act quickly.
• Exemption from Unrelated Debt-Financed Income (UDFI) tax. This is a big deal if you plan to use leverage.

Self-directed IRA drawbacks:

• Every transaction typically requires custodian approval, which can slow things down.
• If you use a loan to buy property in an IRA, UDFI can trigger extra taxes on a portion of your gains.
• No loan feature if you want to tap funds for personal use.

So who should choose what?

• If you’re self-employed and want more flexibility, the solo 401k real estate path makes the most sense.
• If you’re not eligible for a solo 401k, a self-directed IRA might still be a solid option. Just be mindful of tax rules and custodian restrictions.

Pros and Cons of Buying Property with a Solo 401k

Using a solo 401k real estate strategy can unlock powerful benefits. But it’s not for everyone. Let’s break down the upsides and tradeoffs.

Pros

• Tax-advantaged growth: Rental income and appreciation grow inside a tax-deferred or tax-free account.
• Portfolio diversification: Real estate gives you exposure beyond the stock market.
• Leverage potential: You can use a non-recourse loan to expand your buying power. And because the solo 401k is exempt from UDFI, leveraged gains stay protected from extra taxes.

Cons

• Strict IRS rules: One wrong move, like personal use or paying an expense out of pocket, can trigger prohibited transaction penalties.
• No personal benefit: You can’t live in the property, use it as a vacation home, or let your family stay there.
• Illiquidity: Real estate isn’t easily converted to cash. If you need quick access to funds, this strategy may not be a fit.

Smart Strategies for Solo 401k Real Estate Investors

A successful solo 401k real estate investor stays organized and compliant. A few key tips can make the difference between smooth sailing and IRS trouble.

Use an LLC owned by your plan.

This setup gives you added legal protection and easier banking options. The solo 401k owns 100% of the LLC, which is managed by you. You’ll sign checks, sign contracts, and control investments. All under the umbrella of the plan.

Work with experienced professionals.

Don’t go it alone. Use a solo 401k provider who understands real estate transactions. Pair that with a CPA familiar with tax reporting for self-directed plans.

Keep rock-solid records.

Track all income, expenses, repair invoices, and lease agreements. Everything should run through the solo 401k bank account. And nothing should benefit you personally.

File Form 5500-EZ when needed.

If your solo 401k plan exceeds $250,000 in assets, the IRS requires you to file Form 5500-EZ each year. It’s not optional. Missing it can lead to steep penalties.

By following these strategies, you can protect your plan, stay compliant, and build lasting wealth through solo 401k real estate investing.

Final Thoughts: Is Solo 401k Real Estate Right for You?

The solo 401k real estate strategy offers unique potential. Tax-deferred growth. High contribution limits. Direct control over investment decisions. And the chance to grow wealth through physical assets, not just paper ones.

But the rules are strict. There’s no room for shortcuts or personal benefit. You must follow IRS guidelines, document everything, and treat the investment like a business, because it is.

If you’re self-employed and want to invest in property with retirement funds, a solo 401k could be a perfect fit. Just be sure to set it up properly. Work with a qualified provider like Nabers Group who can help you build a plan with checkbook control, real estate flexibility, and full compliance. Contact us if you have any questions about getting your solo 401k account set up.