How to Buy Real Estate Using a Self-Directed 401k
Published September 29, 2008 by Spencer Williams
***This story isn’ a ‘how to use your 401k to buyer real estate.’ I suggest you obtain legal and tax advice before taking action. I’m writing this article because it is real estate related and I think it is interesting but clearly this technique isn’t for everyone.***
This technique wasn’t for me when I looked into buying property a few years back. I haven’t even done the math to see if I would have been better or worse moving funds from stocks into real estate.
Using a self directed 401k in a real estate transaction must be 100% hands off. You can’t use your lovely mountain property for personal use; not even once. If you do, taxes become immediately due and you’ll owe a 10% penalty for making an early withdraw from your 401k before age 59. You are required to hire an independent third party company to manage the property. The restrictions are plenty and the penalties are steep if you don’t abide by the rules.
I’ve typically been interested in hands on property management and giving this responsibility to a third party means giving up too much control, even if it results in a financial gain. Then there’s the element of risk that I want to manage too.
Obtaining a mortgage is possible but I am not clear on how it actually works. There are some tax consequences as the mortgage will be in your name, not the 401k’s.
I’d love to hear from someone out there who has used a self-directed 401k to purchase real estate and is willing to talk about it here. Would you do it over? Why, why not?
Filed under Home Buyers
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