Commercial Property Purchase in a 401k account
If Jeff decide to use a 401k plan, the scenario would look like this. As part
of the funding, he is going to use his own cash and funds in his 401k plan
account for the real estate brokerage firm, a "C" corporation of which he is the
majority shareholder. Jeff has found out that because his traditional IRA is
made up of pretax dollars, he can roll the cash he needs from the IRA over to
the profit-sharing plan. (He will leave the private placements and notes in the
IRA, as his IRA custodian is providing the servicing for those assets. Jeff can
do this because the tax laws changes in 2002 and 2003 permit this. Jeff feels
that it is more convenient to do this transaction through the qualified plan for
the following reason:
* He is the trustee of his own plan and can do the closing personally using
funds from a single source, his plan account.
* Because this is an apartment building, Jeff recognized that there may be a
liability issue concerning tenants. Although he has sufficient insurance based
on his personal risk profile, the qualified plan has an anti-alienation
provision, which will protect those qualified plan assets from creditors
* Because Jeff does his own record keeping, he will be able to collect all
the rents and divide them between his personal account and the profit sharing
plan without having to hire a property manager.
* Jeff wants to move quickly. The purchase contract shows him as the buyer.
Because he knows that until he actual close of escrow, the sales contract is
assignable, until closing there is no issue of self-dealing or prohibited
transaction involving the plan account. The terms of the deal are that Jeff
provides all cash for $720,000 and earnest money of $7,200 to the seller through
escrow.
*Jeff will fund half of the purchase personally.
At this point, Jeff, as trustee and custodian for his plan account completes
the rest of the transaction. As trustee, he acts on his Buy Direction Letter,
which states that he will contact the title and escrow companies to complete the
transaction.
Jeff also engage American Title (ATCO), and he asks for a preliminary title
report. Jeff asks ATCO for the copy of the deed, which will be recorded in the
purchasers' names. The vesting will show 50-percent undivided interest in the
subject property in the name of Jeff as a married person as his separated
property, and the "Jeff Profit Sharing 401k Plan, for the Benefit of
Jeff 401k account, Trustee" for the remaining 50 percent. Closing will occur in
the same manner as with the IRA, with Jeff closing the transaction on behalf of
his plan.
