How to Invest in Real Estate With a Solo 401k

Looking to open a Solo 401k plan? Get started today – The Carry Solo 401k Plan is a featured-packed self-directed account that lets you invest in both traditional and alternative assets, take out a loan, or do a Mega Backdoor Roth conversion.

Purchasing real estate through a retirement account like a Solo 401k may offer meaningful tax advantages. Traditional Solo 401k accounts provide tax-deferred growth until retirement. Roth Solo 401k accounts may allow for tax-free withdrawals if IRS conditions are met—such as reaching age 59½ and keeping the account open for at least five years.

When a property is purchased entirely with retirement funds, rental income and capital gains are typically tax-deferred or tax-free, depending on the account type. However, if your Solo 401k uses a non-recourse loan to buy the property, the account may owe taxes on a portion of the income or gains.

Real estate investing through a Solo 401k comes with unique rules and requirements, since the property is owned by your retirement account—not by you personally.

This guide covers how to purchase real estate with a Solo 401k, including the potential benefits, common pitfalls, and key rules to understand before, during, and after the purchase.

Can You Use a Solo 401k to Buy Real Estate?

Yes. A Solo 401k can be used to invest in real estate, as long as the property is held strictly for investment purposes. The IRS generally prohibits any personal use of the property by you or any disqualified person, such as a spouse, parent, child, or their spouse.

Types of Real Estate You Can Buy With a Solo 401k

✅ Residential and rental properties (e.g., apartments, duplexes, condos, townhouses, mobile homes)

✅ Commercial properties

✅ Raw land

✅ Real estate notes and purchase options

✅ Tax liens and tax deeds

Benefits of Buying Real Estate with a Solo 401k

Two of the main potential benefits of buying real estate through a Solo 401k are tax-deferred growth and, with the Roth option, the possibility of tax-free withdrawals in retirement.

Buying real estate through a Solo 401k can offer two major tax advantages: tax-deferred growth and, if using the Roth option, the potential for tax-free withdrawals in retirement.

Tax-Advantaged Compounding

Investment earnings in a Solo 401k are not taxed annually. In a Traditional Solo 401k, earnings grow tax-deferred until you begin taking distributions in retirement. In a Roth Solo 401k, qualified earnings may grow tax-free, as long as you meet IRS requirements.

Rental income from Solo 401k-owned properties typically flows back into the account without immediate tax consequences. If the property is sold at a profit, the proceeds remain in the plan and may continue to grow tax-deferred (Traditional) or tax-free (Roth), depending on the account type.

📝 Important Note: If you use a non-recourse loan to finance the purchase of the property, a portion of the rental income and capital gains may be subject to Unrelated Business Taxable Income (UBTI).

✏️ Hypothetical Example:

Suppose you purchase a rental property for $200,000. It earns $12,000 annually in rental income, and five years later, it sells for $400,000.

Tax-Free Withdrawals with a Roth Solo 401k Option

Solo 401k plans can include both a Traditional and a Roth account.

✅ Traditional Solo 401k: Contributions are made with pre-tax dollars, and you pay taxes when you take distributions in retirement.

✅ Roth Solo 401k: Contributions are made with after-tax dollars, and qualified withdrawals — taken at age 59½ or older and after holding the account for at least five years — are generally tax-free.

Both account types offer tax-advantaged growth. With the Roth option, retirement withdrawals may be tax-free — including potential gains from real estate appreciation — if IRS rules are followed.

✏️ Hypothetical Example:

Suppose you purchase a property for $200,000 and it grows to $600,000 over time. If the investment was held in a Roth Solo 401k and all IRS rules are followed, the $400,000 in appreciation could potentially be withdrawn tax-free in retirement.

Downsides of Buying Real Estate with a Solo 401k

While a Solo 401k can offer tax advantages, there are several important drawbacks to consider:

❌ Inability to Deduct Losses
In a taxable account, you may be able to deduct losses on real estate if the property declines in value and is sold at a loss, subject to IRS rules.

In a Solo 401k, those losses are not deductible against personal income. The account value simply decreases without a corresponding tax benefit.

❌ Strict Prohibited Transaction Rules
If you engage in transactions with disqualified persons, the IRS may disqualify your Solo 401k and impose taxes and penalties. It’s important to follow the rules carefully to protect the account’s tax-advantaged status.

❌ Liquidity Constraints
Real estate is not a liquid asset. If you need to access cash quickly, it may be difficult to convert the property into funds without a lengthy sale process. This can be a challenge during unexpected expenses.

❌ Complexity and Compliance
Managing real estate within a Solo 401k requires careful attention to IRS rules. This includes avoiding prohibited transactions and following contribution and expense guidelines. These compliance requirements can make real estate investing more complex.

It’s important to weigh these downsides against the potential benefits. Real estate investing through a Solo 401k isn’t for everyone. Be sure the strategy aligns with your long-term goals, liquidity needs, and risk tolerance.

How to Buy Real Estate with a Solo 401k

The process of buying real estate with a Solo 401k is relatively simple—especially if you’re paying with cash.

Before getting started, make sure your Solo 401k provider allows investments in alternative assets like real estate. Not all providers offer this flexibility.

📌 Compare the different self-directed Solo 401k plans here.

Step 1: Open Your Solo 401k Account

If you haven’t opened a Solo 401k yet:

✅ Choose a Solo 401k provider that supports real estate investments
✅ Get an Employer Identification Number (EIN) from the IRS — this can be done online in a few minutes
✅ Fill out your Solo 401k application

📝 Note: Some providers, like Carry, may also help with opening your account and setting up the necessary bank accounts.

Step 2: Open Bank Accounts

Real estate purchased with a Solo 401k is owned by the retirement trust—not by you personally or your business.

To manage funds properly, you’ll need separate bank accounts:

Step 3: Fund Your Solo 401k

You can fund your Solo 401k in two ways:

✅ Make direct contributions from earned income
✅ Roll over funds from another eligible retirement account

Rollovers are typically the fastest way to fund the plan. There are no limits on how much you can roll over, and it won’t affect your annual contribution limits.

Once funded, your account is ready to start making investments — including real estate.

Step 4: Decide How You’ll Pay for the Property

✅ All Cash: This is often the simplest method — use funds from your Solo 401k trust account to pay the full purchase price.

✅ Non-Recourse Loan (Debt Financing): If you need financing, only non-recourse loans are permitted. These loans are backed solely by the property itself — you cannot personally guarantee the loan. If the loan defaults, the lender may only seize the property, not your personal or plan assets.

✅ LLC: Forming an LLC is optional but may offer additional legal protection and simplify property management. In this setup, the LLC is owned by your Solo 401k and holds title to the property. This structure can help shield your plan from certain legal claims, though outcomes vary. Always follow IRS rules to avoid prohibited transactions.

✅ Tenants-In-Common (TIC): Your Solo 401k may co-own a property with another investor through a TIC structure. However, using both personal and Solo 401k funds can trigger prohibited transaction rules. This approach must be planned carefully, and no debt can be involved.

Step 5: Make Your Offer

Work with a title company or real estate attorney who has experience with self-directed retirement plans. Make sure the Solo 401k trust — not your personal name — is listed as the buyer. As the plan trustee, you’ll sign purchase and closing documents on behalf of the trust.

Step 6: Send an Earnest Deposit

Once your offer is accepted, you’ll typically need to send an earnest deposit. This shows the seller you’re committed and gives them confidence to take the property off the market.

Without an earnest deposit, a buyer could make offers on multiple properties and choose later—leaving sellers in a tough spot. The earnest deposit helps prevent this by discouraging indecision.

📝 Note: Earnest deposits aren’t legally required, but they’re a standard part of real estate transactions. Most sellers and real estate professionals strongly expect them.

The deposit is usually 1% to 2% of the property’s purchase price. These funds must come directly from your Solo 401k trust bank account, not your personal funds.
Once submitted, the deposit is usually held in an escrow account, often with a title company or broker, and applied to the down payment or closing costs.

Is an Earnest Deposit Refundable?

Yes, but it depends on the terms of the purchase agreement. Most of the time, buyers can get the deposit back if they back out for a valid reason—like a failed inspection, financing issues, or title problems.

If you cancel the deal for a reason not covered by the contract, the seller may keep the deposit. Make sure the refund terms are clearly spelled out in the purchase agreement to avoid confusion or disputes.

Step 7: Send the Funds and Finalize the Purchase

To complete the purchase, send the remaining funds by check or wire from your Solo 401k trust bank account. You’ll also need to sign the closing documents to transfer ownership.

As the trustee, you’re responsible for keeping all key documents. These include the purchase contract, escrow instructions, settlement agreement, property deed, and any loan paperwork related to the transaction.

Important Rules to Remember

Real estate investing with a Solo 401k comes with powerful tax benefits—but also strict IRS rules. Violating these rules could disqualify your plan, trigger taxes, and result in penalties.

The rules can be complex, but you can read the full explanation here.

The key principle is full separation.  You and certain family members known as “disqualified persons” cannot benefit from or interact with plan-owned property in any personal way.

Here are some of the most important rules to keep in mind when managing real estate inside a Solo 401k:

Bottom line: To stay compliant, all property-related activities—including management, maintenance, and repairs—must be handled by independent third parties. Keeping a clear boundary between your Solo 401k and personal finances is critical.

📌 Here’s a guide to getting started with alternative assets through Carry’s Solo 401k plan.

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Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.

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