Using a Self-Directed 401k to Buy Real Estate

***This is not a ‘how to use your 401k to buyer real estate.’ It requires both legal and tax advice from the appropriate professions. I’m writing this because it is real estate related and I think it is interesting and it clearly isn’t for everyone. I don’t know anyone personally that has done it. Smart Money has an article this month about it.

It wasn’t for me when I looked into buying property with my 401k a couple of years ago. I haven’t done the hypothetical math to see if I would have been better or worse off moving funds out of the stock market and into real estate. I’ve typically been too interested in our properties as we self manage them. Giving that away to a third party means giving up too much control for my psyche, even if it would result in a financial gain. And of course there is the risk.

The gist, as I understand it, of the using a self directed 401k in a real estate transaction is that it has to be 100% hands off. You can’t use that lovely beach-front property for personal use; even once. If you mess up the taxes become immediately due and you’ll be facing a 10% penalty for withdrawing from your 401k before age 59. You are required to hire a third party to manage the property. The restrictions are many and the penalties are steep.

I know it is possible to get a mortgage but I am not clear how it works. There are tax consequences as the mortgage is going to be in your name, not the 401k’s. I cannot reiterate seeking professional tax and legal advice before heading down this road.

It would be great if there is someone out there that has used a self-directed 401k for a real estate purchase and is willing to talk about it here. Would you do it again?

6 Comments on “Using a Self-Directed 401k to Buy Real Estate

  1. Charles, if you haven’t seen it, you may find http://www.guidantfinancial.com/ interesting. I looked into it, but was unable to pursue it because I couldn’t shift funds from my company plan to an external plan while I’m still employed with that company.

    Now I’m just trying to get out from under an upside down property in rural Hillsboro so that I can move on, but that’s another story…


  2. I have gone to seminars that talked about purchasing real estate with your 401K but have never met anyone that I knew that has purchased real estate this way.

    I wonder in this market if it’s still possible with all the strict quidelines and the lack of loan programs.

  3. Charles,

    I regularly post information about self directed 401k investing on my blog at http://www.jeffnabers.com.

    You can’t get a mortgage in your name on behalf of your 401k, by the way. But, your 401k can obtain a non-recourse loan to finance its real estate purchase.

    You are right about the inability to personally use the 401k owned property – it is for investment purposes only. If you violate the rule, there is a 15% tax on the amount involved (the value of the property) and the prohibited transaction is not corrected within 12 months, there is a 100% tax.

    I don’t want to scare you though. There are thousands of people using self directed retirement accounts. As long as you comply with prohibited transaction rules, there is plenty to gain from using a self directed 401k.

  4. Hi Charles!

    My name is Katie and I work for Guidant Financial Group. You are absolutely correct that a self-directed IRA or 401(k) is not for everyone.

    But, for those who want more control over their investments, a self-directed IRA can make a lot of sense.

    One thing I did want to mention to you is that you do not, in fact, need to have a third-party manage properties owned by your IRA. A few companies out there, including Guidant, do allow the IRA owner to act as manager of the property. You would not be able to pay yourself as manager, nor would you be able to perform any work on the property that would add capital value to it (i.e., replacing the roof or applying exterior paint), but you would have control over collecting rent checks, selecting tenants and the day-to-day maintenance and upkeep.

    Some companies out there (again, Guidant included) also allow you to simultaneously invest in the stock market and the non-traditional markets, meaning that you don’t have to put all your eggs in one basket (nothing ever wrong with a little diversification, right?!).

    For more inforamtion on these things, and much more, you can check out Guidant’s blog (http://blog.guidantfinancial.com), or the FAQs (http://www.guidantfinancial.com/resources/faq.aspx).

    Happy investing!

  5. Charles, I’ve been researching this topic for some time. Perhaps Jeff could address it since he mentioned using a non-recourse loan to help finance a piece of real estate with a 401k. I know with an IRA there is a tax called UDFI unrelated debt financing. I watched a video of his on YouTube which mentioned there was an exemption for UDFI as it relates to the solo 401k.

  6. Sorry, but the URL in my previous post did not validate. Here is the domain again…. Best of luck with your future endeavors.

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