QUESTION:
Are we allowed to build a rental property vacation home with solo 401k funds? It would be 100% rental income in a resort area.
ANSWER:
With respect to a Solo 401k investment in real estate, unrelated business income tax (UBIT) could apply if the income generated is considered business rather than investment income. For example, with respect to income generated by a Solo 401k investment: income generated from fixing and flipping a higher volume of properties may be considered business income that is subject to UBIT whereas rental real estate income is generally considered passive investment income and not subject to UBIT. One type of rental real estate income that may be considered business income, however, is short-term rental income as described here. Practically speaking, whether income is considered short-term will depend on the facts and circumstances (e.g. the average rental period, etc.).
Are we allowed to build a rental property vacation home with solo 401k funds? It would be 100% rental income in a resort area.
ANSWER:
With respect to a Solo 401k investment in real estate, unrelated business income tax (UBIT) could apply if the income generated is considered business rather than investment income. For example, with respect to income generated by a Solo 401k investment: income generated from fixing and flipping a higher volume of properties may be considered business income that is subject to UBIT whereas rental real estate income is generally considered passive investment income and not subject to UBIT. One type of rental real estate income that may be considered business income, however, is short-term rental income as described here. Practically speaking, whether income is considered short-term will depend on the facts and circumstances (e.g. the average rental period, etc.).
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