Similar to an IRA LLC, a 401(k) LLC (some 401(k) trustees elect the LLC feature, some do not) is a structure where an LLC, whose sole member is the 401(k) plan, invests on behalf of the 401(k). In instances where investments are being made into real estate, the LLC structure can be of great benefit to the Trustee and the plan. In fact, it is not uncommon for a Trustee to have an LLC established for each and every property held by the 401(k). This is done for both legal and accounting purposes. With this introduction of the 401(k) LLC, I receive the occasional question, “does the manager of a 401(k) LLC need a real estate license?”
In short, NO!
First and foremost, if the manager utilized a real estate license for this purpose they would likely be entering into an IRS prohibited transaction. The manager of the LLC is, in most cases….you. You are also a disqualified individual to your plan and are expressly prohibited from providing any benefit or service (except for small administrative responsibilities) to the plan. The mere provision of this arranged service would constitute a prohibited transaction. Being the manager of a 401(k) LLC, and executing transactions on the behalf of the 401(k) LLC would, undoubtedly, trigger a prohibited transaction.
Having a variety of clients, some of them have a business (separate from their 401(k)) structured as an LLC and execute real estate transactions in this business. Especially if they are an employee of the LLC and receiving real estate-based compensation, do they need to be licensed?
In a recent post written by Phoenix attorney Chris Combs of Combs Law Group, P.C., Chris clearly states that,
“An owner of real estate, or a principal of an LLC that owns real estate, generally does not have to have a real estate license to sell, lease, or manage that real estate.”
As noted earlier, besides not being able to provide services to your 401(k), you also do not need the license. For those of you who have an LLC business (again, unrelated to your 401(k) LLC) that sells or manages real estate, how does this affect you? In simple terms, what if you own a business that executes real estate sales, collects rents, provides landlord services? If this “box” fits you, must an employee(s) of an LLC have a real estate license?
Chris states: “An employee of the LLC, however, that receives compensation for any such activity generally needs a real estate license.”
As the manager of a 401(k) LLC, you cannot provide services to your 401(k)…so, this is a moot point. However, for those of you who operate a separate LLC business that owns or otherwise transact real estate services, you or any employee of that LLC will most likely need to be real estate licensed. If you are interested in reading Chris’ short blog on this question, please click here.
As always, the information provided is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. One must always consult with their respective professional in all such matters.