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Real Estate Investment in a Trustee-Directed 401k Plan


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The trustee wants to invest a portion of the plan assets into the purchase a home for himself, keeping it as a plan investment.  In relatively short time he will then sell the house and put whatever earnings there are back into the plan to be shared by all participants.

I do not deal with real estate in plans enough but this doesn't sound right.  Is this a PT?  Assuming the plan permits real estate investments and he has it independently valued annually, can he really his own house and keep it as an asset in the plan?

Thanks for any replies

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What Bill Presson said.

Unless the trustee is ready to:

resign or recuse,

spend the time and lawyers’ fees to get an individual prohibited-transaction exemption,

spend the fees for independent fiduciaries to make all decisions (which might include that the real property is not a prudent investment for the plan’s trust),

spend the fees for independent appraisers—to estimate each fair-market value for the initial purchase price, each year’s valuation, and the price at which the plan may sell the property,

pay the plan’s successor or separate trustee the fair-market rent the independent persons set, and

meet other conditions the Labor department likely would require,

isn’t this a nonstarter?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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  • Lois Baker changed the title to Real Estate Investment in a Trustee-Directed 401k Plan
19 hours ago, Bill Presson said:

classic

I would use the word blatant, but yeah, if that is not the perfect example of a PT, I don't know what is. I remember seeing this sort of stuff a lot back in the 80's when I first started and most/all PSPs were pooled balance forward trustee directed. Vacation homes/condos, timeshares, antique/collectible cars, etc. 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Coincidentally a single member plan client just asked if RE is an option.  I Googled it.... This came up (ASPPA - Real Estate as a Plan Investment).  It talked about distributions "in kind". Made me think...🤔  If this client purchased something, never used it herself, nor let any relatives use it and then when she closes the plan took the property in kind... would that work?

I ran into an issue years ago where a  wealth client was purchasing  limited partnerships.  The plan was audited and the agent pressed that the LP investments needed to be valued every year.  For RE, I am guessing the "assessed" value for tax purposes is not sufficient?  

Then there is the technical aspect of the purchase and maintenance... the plan technically owns the property, RE taxes must come from the plan, maintenance comes from the plan.  

Thoughts?

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In theory, yes, this should work. All maintenance, expenses, taxes, etc. would have to be paid from the plan, meaning there needs to be cash in the plan as well. The odds of all that happening - actually happening - in my experience are very low. Plus appraisals.

Also, when the real estate is distributed in-kind, it's subject to withholding, which is another interesting conversation. If the participant reaches RMD age before the property is distributed, that becomes a challenge too. 

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8 hours ago, EBECatty said:

In theory, yes, this should work. All maintenance, expenses, taxes, etc. would have to be paid from the plan, meaning there needs to be cash in the plan as well. The odds of all that happening - actually happening - in my experience are very low. Plus appraisals.

Also, when the real estate is distributed in-kind, it's subject to withholding, which is another interesting conversation. If the participant reaches RMD age before the property is distributed, that becomes a challenge too. 

It can be distributed in-kind to an IRA custodian. There are specialty custodians that will handle that across the US. 

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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10 hours ago, Bill Presson said:

It can be distributed in-kind to an IRA custodian. There are specialty custodians that will handle that across the US. 

Sure, although I had assumed the goal of distributing it in-kind was so the account owner could use the property. The facts involved a one-participant 401(k) plan, so I don't think rolling it over from a solo 401(k) to an IRA would solve the issue of the owner be able to use the property (or the RMD issue).  

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On 6/7/2024 at 8:14 AM, EBECatty said:

Sure, although I had assumed the goal of distributing it in-kind was so the account owner could use the property.

That is correct... I didn't think of that part.... the fact that upon distribution in kind withholding on it's value would be required.  It's not worth it to me.  And even though I spell out the rules,  will they (the rules) be followed explicitly?  I agree with EBECatty below

On 6/6/2024 at 1:22 PM, EBECatty said:

In theory, yes, this should work. All maintenance, expenses, taxes, etc. would have to be paid from the plan, meaning there needs to be cash in the plan as well. The odds of all that happening - actually happening - in my experience are very low. Plus appraisals.

Thanks for your responses

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