The straight answer to your question is "yes, your Solo 401(k) plan can purchase physical real estate as an investment."

Beware, though, that such a purchase must not be from a Disqualified person. So, your Solo 401(k) plan is not to buy property owned by you, a close family member, etc. Have the Solo 401(k) plan purchase the rental property the way most people buy a home - from someone they don't even know.

Also, the Solo 401(k) plan must be the entity that handles the entire transaction and continued transactions: that means the purchase price, the closing costs, the rental income checks, the maintenance payments, the real estate taxes, et al. All transactions must involve the Solo 401(k) plan's bank/credit union account. Any commingling with your own accounts (even though you are the Trustee and Administrator) would be greatly frowned upon by the IRS.

Finally, assuming that you will seek the advice of a third party to help structure this transaction, it is advised that this independent party not use the term "Tax free" when describing your Solo 401(k) investment. The proper term is "Tax deferred." Marketers and other solicitors may use "Tax free" wording because they do not understand the term (Municipal Bonds pay interest Tax-free while Qualified retirement plans allow certain investments to grow Tax-deferred until you take the money out, and pay the Taxes that had been deferred until this future time).

*Tax Disclaimer* The above material is not to be construed as a complete analysis of all Tax considerations. The opinion issued should not be used to avoid or evade Taxes, nor should it be relied upon to avoid any proper federal and/or other Tax-related penalties. Accordingly, this material is not intended or written to be used (and a Taxpayer cannot use it) for the purpose of promoting, marketing, and/or recommending to another party any Tax-related matters. Please be aware that Tax laws are subject to change at any time. Consult your trusted independent Tax advisor for the latest information/interpretations of Tax law.

Another consideration to add to the answer given above: Property held by a 401k won't be allowed any kind of deduction for depreciation expense.