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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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 is a tough concept for some investors to grasp because it can be difficult to conceptualize who is really investing.
Example: Selecting contractors, choosing fixtures, screening tenants, etc.
Facts: You are ultimately the decision maker for all investment-related decisions. However, IRS code prohibits you from personally adding sweat equity to the property. This means that you are not permitted to perform repairs or upgrades; they must be done by a non-disqualified person and paid for by the IRA. To the IRS, value-added services that are personally rendered constitute contributions that cannot be taxed and are therefore disallowed. The bottom line is that your IRA must have access to an adequate cash buffer necessary to pay all expenses related to the property.
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: The short explanation here is that your IRA cannot employ an entity that is managed or controlled by you or your direct lineal ascendants or descendants. 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.
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 your client portal at portal.ndtco.com.