Many self-directed investors who call our office ask, “Can I act as the property manager for my IRA-owned real estate?” The answer is yes, but there are several rules that must be followed in order to comply with IRS guidelines.
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Do not handle the finances of your IRA-owned real estate personally
Example: Pay bills or expenses out of pocket, have rent checks made out to you personally, etc.
Facts: When investing in real estate with your self-directed IRA, you’re technically not the investor even though you’re the “self” pulling the strings in the self-directed approach. The IRA (a legal entity) is the real investor and title to the real estate is most likely held in the name of the IRA (Example: NDTCO, Trustee, FBO [Client Name] [Account Type]). This can be tough to grasp because it can be difficult to conceptualize who is really investing.
You make the decisions
Example: Selecting contractors, choosing fixtures, screening tenants, etc.
Facts: You ultimately make all investment-related decisions. However, the IRS code prohibits you from personally adding sweat equity to the property. This means you cannot perform repairs or upgrades; a non-disqualified person must perform these actions and the IRA must pay for these services. The IRS disallows personally rendered value-added services because they constitute untaxable contributions. The bottom line: Your IRA must have adequate cash to pay any expenses related to the property.
A disqualified person or entity cannot manage IRA-owned real estate
Example: IRA Holder says, “Well, since I can’t personally manage the property for a fee, can the IRA pay a property management company that I own and manage myself?”
Facts: Your IRA cannot employ an entity that you or your direct lineal ascendants or descendants manage or control. The IRS logic here is to keep all IRA transactions at arm’s length and not co-mingled with any personal benefit. To truly understand this rule, read more about IRS rules under Section 4975 of the Internal Revenue Code.
You cannot take a personal commission as a real estate professional for brokering your IRA’s real estate transaction
Example: As a real estate agent by profession, you’d like to help yourself by brokering the transaction and taking the commission for the deal.
Facts: As mentioned above, IRA transactions need to be made at arm’s length and separate from any personal benefit. You are not permitted to immediately benefit from your IRA investments. After all, you’re investing for tomorrow, not today. You can negotiate a change in the purchase price of the property that may reflect your services, but you may not take a commission personally.
For more information about real estate IRAs and individual retirement accounts, give us a call at 877-742-1270 or send us a message through the Client Portal.