Rental Moved Out of Solo 401(k)

Client owned a rental inside of their Solo 401(k). They re-titled/deeded the property into their personal name in 2019.

Is this a prohibited transaction, an early distribution, or both?

What steps can we take to unwind this and make the plan whole?

Pretty sure the moment they did this, they effective distributed all assets out of the plan and will pay tax on them in 2019. Not sure there is any way to unwind this.
I may be thinking of IRA rules, though.
Big, bad, no-no.

Why did they do this? Research the doctrine of rescission and RR 80-58. I wouldn't be too optimistic, though.

@CaptCook - I believe you are thinking of IRA rules. I think you can work to make a 401(k) whole and cure the issue. Could be wrong.

@Nilo - I'll check those out. Why did they do this? Because they thought they were skirting UDFI/UBIT and didn't call me first.

I'm still stuck on whether this is a PT or simply a distribution of plan assets. Thoughts?

Usually, the only way you can get monies out of a 401k is for a specific reason. Hardship distribution, participant loan, RMD requirements. You will find you can't just take a huge amount of money out and call it a distribution. It could very well be a plan termination.

The IRS website has a "fix it" guide, but the remedies are for errors in allocation, errors in plan eligibility, etc.

https://www.irs.gov/retirement-plans/40 ... x-it-guide

Don't forget the 20% withholding on the distribution.

I'm still stuck on whether this is a PT or simply a distribution of plan assets. Thoughts?

I'm out of my element here, but I saw no exception or exemption in 4975 to this being a prohibited transaction.

I think this may be a huge problem. Here's what I found:

Can I sell my existing house owned by me or my business into my solo 401k plan?

ANSWER:
No. If you or your business sell a house/building to your solo 401k plan, it will be in violation of the prohibited transaction rule.
The same is true vice versa-meaning, neither you nor other disqualified persons may buy an existing house/building owned by your solo 401k as this would also be in violation of the solo 401k prohibited transaction rules.

By deeding the house to them personally, your client may have sold/gifted the house to themselves.

First question to ask the client is why they did this. This is very important so do not skip this. What were they trying to accomplish?

Second question: who was involved in advising the client to do this?

Last but not least, if this is a result of DIY on your client's part, let them know how much it cost them. And also let them know that your consulting fees would have cost them only x,xxx, which would have saved them xxx,xxx. And your tax consulting fees are tax deductible so their real cost is only xxx. Good luck!

Yeah, tax prep fees are no longer deductible for a non-business 1040, but consulting fees on a 401K are passed on to the 401K.

I'm curious as to where the plan administrator/custodian/trustee was during all this?

For what it's worth, below is a link to an article from the mysolo401k website.
https://www.mysolo401k.net/invest-self- ... -and-land/

Here's the first listed rule:
"The 401k owned real estate may not be sold or exchanged to the 401k owner or his or her relatives mentioned above"