LLCs are magnificent legal creatures with a number of fantastic uses. One potential use is that they can act as an investment vehicle for your 401(k). They can also hold other LLCs. It is by no means out of the ordinary to establish a separate LLC for each property held in the 401(k).
However, some folks wonder if they’re going to buy property with their 401(k) LLC, do they need to have a real estate license. The short answer is: no.
Not only do you not need a real estate license to purchase real estate with your 401(k), but if you use your real estate license to purchase property, it could be flagged as a prohibited transaction by the IRS.
Retirement accounts such as 401(k)s and IRAs are prohibited in investing in businesses that you are receiving a profit from or properties that you yourself (or your family members) derive a benefit from.
Being both the manager of the 401(k) LLC and simultaneously executing transactions with your real estate license on behalf of the 401(k) would be red-flagged by the IRS as a prohibited transaction.
Even then, the answer is no. Neither an owner of real estate nor a principle of an LLC needs to have a real estate license to execute trades related to real property. That includes selling, leasing, or renting.
Even those who have an LLC business that is not related to their 401(k) LLC would not necessarily need a real estate license for the purpose of executing trades.
Well, the answer is sort of simple. An employee who is executing trades, managing properties, showing houses, or otherwise engaged in real estate transactions would need a real estate license. You as the owner or principle, however, do not.
Basically, because you own the property or the company that owns the property, no one really cares if you have a real estate license or not. In fact, if you’re using your real estate license to execute trades from your 401(k) it would probably work your disadvantage since it would be a conflict of interest according to IRS rules.
If you’re still fuzzy about the issue, it’s always best to contact a tax professional.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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