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.
1. 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 IRA,
you are not the investor. 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: NDIRA,
Inc. FBO Client Name IRA). This is a tough concept for some investors to
grasp because it can be difficult to conceptualize who is really investing.
2. You
are allowed to be the decision-maker.
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 a contribution 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.
3. A disqualified
person or entity cannot be hired by the IRA to manage 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 completely arms-length and not co-mingled with any personal
benefit. To truly understand this rule, you need to continue reading more about
“Disqualified Persons” under Section 4975 of the Internal Revenue Code.
4. 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 as arms-length investments, separate from any personal benefit. You are
not permitted to immediately benefit from your IRA investments; rather, you are
investing for the future. 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.
