Yes. Your plan can co-invest with other parties to purchase real estate in a variety of structures. Partnering allows your plan to access larger deals, share risk, and leverage professional management without committing the full purchase price from a single source.
When your co-investors have no disqualifying relationship to your plan, partnership arrangements are straightforward. The two most common structures are:
Tenants-in-common is the simplest approach for small groups. Each party holds fractional title to the property directly, proportional to their capital contribution. There is no separate entity to form or maintain, and each party handles their own income reporting. A written co-ownership agreement between the parties is strongly recommended.
LLC or partnership entity structures suit larger groups or situations where partners want unified administration and liability protection. The entity holds title, maintains its own bank account, and files a partnership tax return that passes income to each partner on a Schedule K-1. Your plan holds a membership interest proportional to its capital contribution.
One rule applies regardless of structure: you may not personally provide services to the partnership, act as general partner, or receive compensation in any form, when your plan is a co-investor. A third party, including a non-plan partner investing personal funds, can perform those services and be compensated for doing so.
A transaction between your plan and a disqualified person such as yourself, your spouse, lineal family, or entities they control, is a prohibited transaction under IRC Section 4975. However, some advisors take the position that co-investing plan funds alongside disqualified person funds is technically possible under certain conditions, provided the arrangement is structured carefully from day one and all parties contribute and receive income strictly in proportion to their ownership.
Even where this position has merit, the complexity is real. Any change in circumstances, a partner needing to exit, a cash call that parties cannot meet equally, or a change in ownership percentage, creates renewed prohibited transaction risk. Restrictions on how and when capital can be added or withdrawn make these arrangements difficult to keep clean over the life of a project.
If you are considering a partnership that involves a disqualified p[erson in any capacity, involve qualified legal counsel before proceeding. This is not a structure to approach without expert guidance.
Do all partners have to be using retirement funds?
No. Whether your co-investors are using personal funds, business capital, or their own retirement accounts has no bearing on your plan's ability to participate. The only relevant question is whether any co-investor is a disqualified person to your specific plan.
Can a non-plan partner receive equity for services to the partnership?
Yes, and this is a common arrangement. A real estate professional who sources the deal, negotiates the purchase, and manages the property over time may receive an equity interest in the partnership as compensation for those services, in lieu of or in addition to a management fee. Your plan can participate alongside that partner without issue, provided the equity-for-services arrangement is with a non-disqualified person. You and other disqualified persons to your plan may not receive equity or compensation from a partnership in which your plan has an interest.
Can my plan buy out a partner's interest later?
Yes, provided the seller is not a disqualified person and the transaction is at fair market value. Get an independent valuation before any buyout to confirm the price is arms-length.
This information is provided for educational purposes only and should not be interpreted as tax, legal, or investment advice. Readers are encouraged to consult a qualified professional who can offer guidance based on their personal situation.