When a CPA Says The IRS Prohibits A Solo 401K From Investing in Real Estate

A lot of old school CPAs still believe that you can’t use retirement vehicles like 401(k)s or IRAs to invest in real estate. They say this despite the fact that thousands of people all over the country are using retirement vehicles to do just that.

And why not? Real estate is an excellent investment right now. We’re not talking about derivatives or investing in financing, we’re talking about the real estate itself. Real estate has always been a smart investment because the value of real estate moves in the opposite direction currency does.

In other words, as the value of currency goes down due to inflation or other economic factors, the value of real estate goes up. Real estate isn’t the only investment that is true of, but the market for real estate is booming everywhere right now and that doesn’t appear to be changing because it’s not due to anything more than supply and demand. There are more folks entering the housing market now, and their options are increasingly limited due to the fact that inventory is low.

Why Some CPAs are Leery about Using Retirement Vehicles to Invest in Real Estate

Traditionally, IRAs and 401(k)s, even when they are of the self-directed variety, have been used to invest in stocks, bonds, and mutual funds. Real estate is a separate kind of investment entirely, and CPAs are justifiably cautious when it comes to using a Solo 401(k) to invest in real estate.

But the same rules that apply to any investment in your Solo 401(k) also apply to real estate. That is to say, you cannot directly benefit from property in any way. You cannot reside on the property. No one in your family can reside on the property. Any monies received from the investment must be paid directly to the retirement account, and finally, you cannot manage the property yourself. You’ll need a property manager.

With that in mind, you can (in fact) hold real estate in a retirement account. Regardless of how suspicious a CPA might be of doing so, it’s perfectly legal.

On the other hand, not every trustee out there is going to offer their customers the option of using their retirement account to invest in real estate. That may, actually, take a bit of digging. You’ll need to find a trustee who is not only capable but also willing to establish and manage an account that allows you, as the account owner, to invest in “non-traditional” assets like real estate.

But once you’ve found them, you’ve tapped into one of the most lucrative markets in today’s economy. So it’s well worth the effort.

Last Updated: 
June 13, 2018

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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