Real Estate Financing for the Solo 401k

Real estate is a popular goal for many self-employed investors. But buying property through a retirement account? That surprises a lot of people. With a Solo 401k, it’s not only possible—it can also be potentially beneficial for those looking to grow their retirement savings outside the stock market.

If you’re exploring ways to diversify your portfolio using retirement funds, this guide breaks down what to know before taking the next step.

📌 Also Read: Solo 401k Real Estate Flipping: How It Works

Why Use a Solo 401k for Real Estate?

Real estate isn’t just for traditional investors. If you’re self-employed, your Solo 401k may open the door to property ownership without dipping into your personal savings. But it’s important to know who qualifies and how the structure works. 

Who Can Use a Solo 401k?

A Solo 401k is designed for self-employed individuals and business owners, including sole proprietors, single-member LLCs, partnerships, and S corporations. To qualify, you must not have any full-time employees other than yourself or your spouse.

As the plan trustee, you’re responsible for:

Some investors opt to create an LLC owned entirely by the Solo 401k trust, with themselves acting as manager. This setup isn’t required, but it can streamline title management and provide added liability protection.

Key Benefits and Risks

Real estate investments within a Solo 401k come with notable upsides and a few important caveats:

✅ Benefits:

❌ Risks and Considerations:

📌 Note: Rental income and gains from debt-financed properties held for investment are generally exempt from UDFI under IRC Section 514(c)(9) for Solo 401k plans.

How to Finance a Property Purchase

Once your Solo 401k is in place, the next question is how to pay for the property. You can use cash from your plan or explore non-recourse loans. Each option has its own pros and cons.

Buying With Cash From Your Plan

Using 100 percent of your Solo 401k funds to purchase real estate comes with some clear trade-offs:

✅ No UBTI risk. All-cash deals avoid unrelated business taxable income and unrelated debt-financed income.

✅ Simpler execution. You skip the paperwork, interest costs, and lender approval process.

❌ Low liquidity. You may not have enough funds left for repairs, distributions, or future investments.

❌ No leverage. Without financing, your buying power is limited and you could miss out on higher returns.

How Non-Recourse Loans Work

A non-recourse loan is backed only by the property. If the loan defaults, the lender cannot go after you personally. These loans often come with specific requirements:

✅ A down payment of 40 to 60 percent of the purchase price

✅ Loan-to-value (LTV) typically capped at 50 to 60 percent

✅ No personal guarantee—the Solo 401k plan is the borrower

✅ Higher interest rates compared to conventional loans, since the lender takes on more risk

Where to Find Lenders

Not all lenders offer non-recourse financing for retirement accounts. Some options to consider:

To apply, you may need to provide:

✅ Your Solo 401k plan document

✅ Trust or LLC operating agreement

✅ Bank statements for the plan

✅ A property appraisal

✅ Insurance documents required by the lender

Tax Rules on Financed Deals

When a Solo 401k uses non-recourse financing, it is typically exempt from UDFI tax under Section 514(c)(9) of the Internal Revenue Code. Rental income or gains from the property usually won’t be subject to UBTI.

But be cautious: If your plan engages in frequent flips, short-term rentals, or real estate development, the IRS may classify it as a business. In that case, Form 990-T must be filed, and income may be subject to tax.

What to Do After You Set Up Your Plan

Once your Solo 401k is active, the next step is to make sure the plan is properly funded, managed, and kept in compliance. Here’s how to move forward with confidence.

Setting Up and Funding Your Plan

Start by choosing a Solo 401k provider that supports real estate investments. Look for one that offers a trust or LLC setup. Some providers, like IRA Financial or Carry Advisors LLC, focus on real estate–friendly plans.

Once you’ve selected a provider:

1. Adopt plan documents. Sign a Solo 401k plan agreement that explicitly allows real estate investments.

2. Open a plan bank account. Set up a checking or brokerage account in the plan’s name or under the LLC’s EIN.

3. Fund the account. Use a rollover or direct transfer from an existing IRA or employer plan. A trustee-to-trustee transfer avoids mandatory tax withholding and keeps your full balance intact.

Buying Real Estate Through Your Plan

When you’re ready to make a purchase:

✅ Hold title correctly. The property must be titled in the name of the Solo 401k trust or in an LLC fully owned by the trust.

✅ List the plan on documents. The deed, contract, and loan paperwork should name the Solo 401k trust (or LLC) as the buyer.

✅ Keep income and expenses separate. Rental income must be deposited into the Solo 401k account. All expenses and loan payments must also come from that account—no personal funds allowed.

Staying Compliant With the Rules

Keeping your plan in good standing is essential:

✅ File Form 5500-EZ.  If your plan assets exceed $250,000 at year-end, file by the last day of the seventh month after the plan year ends (July 31 for a calendar-year plan). No filing is required if assets remain below that threshold.

✅ Avoid prohibited transactions. Neither you nor your family members can live in, use, or personally benefit from the property.

✅ Watch for UBTI. Passive rental income is usually exempt under IRC 512(b)(3). But if your plan runs a real estate business, like flipping or short-term rentals, you may need to file Form 990-T and pay UBTI.

Picking the Right Lenders and Pros

The right experts can help you avoid mistakes:

✅ Work with non-recourse lenders. Choose banks or credit unions that understand how Solo 401k loans work. Examples include First Western Federal Savings Bank and North American Savings Bank.

✅ Hire a real estate attorney. Look for someone familiar with retirement plan purchases who can review contracts and handle title issues.

✅ Talk to a tax or ERISA advisor. Get guidance from someone who understands Solo 401k rules, including tax filings and prohibited transactions.

📝 Note: Staying compliant and working with experienced professionals can help you protect your plan’s tax benefits while building long-term value through real estate.

Final Thoughts on Financing Real Estate With a Solo 401k

Using a Solo 401k to invest in real estate gives self-employed investors a unique opportunity to diversify their retirement portfolio. Whether you choose to buy with cash or use non-recourse financing, understanding the setup, rules, and risks is key.

This strategy isn’t for everyone, but with careful planning and the right support, it may align with your long-term financial goals. Be sure to review your options, stay compliant, and work with professionals when needed.

📌 Want more tips on building retirement wealth and managing alternative assets? Check out these articles on Solo 401k strategies, tax rules, and investment options:

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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.

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