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Forums » Tax, Legal Issues, Contracts, Self-Directed IRA » Managing properties held by your self-directed IRA

Managing properties held by your self-directed IRA

22 posts by 10 users

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Real Estate Investor · Garland, Texas


Can you manage properties held by your self-directed IRA? Assuming you do none of the hands on work? Same question for managing the rehab.

What if your SD IRA owns part of the property but you provide property management? Again, doing no hands on work yourself?

Example: your SD IRA buys 33% of a property via a JV. You oversee the rehab, lease up, and ongoing management? Kosher? If not, what are some ways to make it work?


Jon Klaus, SellPropertyFast
E-Mail: [email protected]
Telephone: 214-929-6545
Website: http://www.facebook.com/Buttermilks


· Grand Rapids, Michigan


Hi Jon, I think the more important question here would be, "Are you personally being paid any money in return for managing the property?" You can probably "manage" it all day long if you want to, as long as you aren't siphoning off any profits from the investment itself.

From my interactions with the people at Equity Trust (the custodian for my self directed IRA), it all boils down to having a clear separation between yourself and your IRA - and who receives the capital gains from that investment. If this investment generates a profit in any way, it needs to go back into your IRA account (at least, the appropriate percentage that your IRA owns).

In my opinion, if you were to pay yourself for managing this property, it starts to blur the lines between who is actually pulling the gains out of the investment. The IRS may have some provision for this, but I think it gets into a gray area that I personally wouldn't want to mess around with.

Whenever I buy properties using my self-directed IRA, I generally only do so if know it won't be problematic to keep things segregated.



SFR Investor · Phoenix, Arizona


The scary part of Ira investing is that much of this hasn't been spelled out by the IRS, as far as what they really expect. The other side of "managing" a property is that the Ira is "benefitting" from the "work" (management) that you are providing. Since investors might normally pay a pm 5-10% in management fees, your self-management could be considered a "contribution" to the Ira, and the entire account could be retroactively disallowed & taxed. Not cool.



SFR Investor · Wheat Ridge, Colorado


When I set up my account with Guidant, the lawyer I worked with said managing a rental was OK, because the effort required for property management was minimal. I've read some of the IRS audit guidelines that say about the same thing, when evaluating returns where the filer claims "real estate professional" status based on managing rentals. But I don't own any rentals in my IRAs, so I've not actually deal with this.

Even if you make a contribution to your IRA, it won't be considered distributed. A prohibited transaction, yes. But not a contribution. As far as I can tell.


Jon Holdman, Flying Phoenix LLC


Rehabber · Santa Clarita, California


Jon, I would check with the IRS on this but my take would be no and here is why. You are a disqualified party to your IRA as is any entity you own with a 50% or more interest. If your IRA owned 33% and you partnered with your IRA (which can be done but tricky) taking the balance ownership, I believe the IRS would look at that deal as the IRA owner benefiting and thus not allowed, however, I could be wrong on this so I would definately check into it.

Even if the IRS gave the green light, I would be shy on doing deals like this as it comes to close to the gray areas and IRA funds are not worth risking when you can make money without the very same risk and problems. That is my take on it.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Real Estate Investor · Jacksonville, Florida


I believe there are 2 issues to contend with as mentioned above. Most people seem to feel you should take no compensation or risk comprimising the tax deferred status of your IRA. The comment mentioned above about not paying yourself and considering your time and effort that you do without compensation that you would normally pay to a management company is essentially like making a contribution to your IRA. If you are maxing out your IRA this would be a way that it could be perceived that you are contributing more than you are allowed.

Interesting topic, I don't own any in my IRa so don't face this issue, I just stick with private lending in my IRA. I guess you could say the same thing about reviewing loan applications and properties, should my time doing that be considered a contribution.

As I'm typing I'm guessing managing a property, making decisions about private loans or spending your time make selections of what mutual funds or stocks to buy could possibly all fall in the same category, so maybe all of that is okay?



Rehabber · Santa Clarita, California


Originally posted by Tim Delp:
As I'm typing I'm guessing managing a property, making decisions about private loans or spending your time make selections of what mutual funds or stocks to buy could possibly all fall in the same category, so maybe all of that is okay?
No, apples and oranges. In a self directed or even a traditional IRA, choosing which stock, mutual fund, or note is a necessity, even if you have a broker, the decision is still up to you. As such, these decisions are not "contributing" to the IRA. However, providing property management or swinging the hammer in the rental unit IS contributing to the IRA. Two entirely different animals. Check with the IRS and they will tell you the same thing.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


SFR Investor · Wheat Ridge, Colorado


@Will Barnard, where do you draw the line? If you make direct loans from your IRA, you have to do vetting of the borrowers and evaluate the property and deal. That's not zero effort. In fact, its actually pretty similar to evaluating tenants for a rental property. And evaluating stocks or mutual funds can take a similar level of effort. So, while I'd agree about doing the rehab on a property your IRA owns would be a contribution, and having the IRA pay you any sort of fees for doing anything is a clear prohibited transaction, the exact line is pretty fuzzy. So, I can only offer what I was advised by a lawyer who practices in this area. Doing PM for a rental owned by your IRA is OK, according to this lawyer. As you and I have discussed here before, I don't think owning properties in an IRA is particularly profitable, so this is a non-issue for me.

@Jon Klaus, who owns the other two thirds? I think Will is assume its you personally. But I'm not sure that's what you meant.


Jon Holdman, Flying Phoenix LLC


Real Estate Investor · Garland, Texas


@Jon Klaus, who owns the other two thirds? I think Will is assume its you personally. But I'm not sure that's what you meant

Another investor would own the rest of the property.


Jon Klaus, SellPropertyFast
E-Mail: [email protected]
Telephone: 214-929-6545
Website: http://www.facebook.com/Buttermilks


Rehabber · Santa Clarita, California


@Jon Holdman We are on the same page here except for the PM. While the line is fuzzy, it is only fuzzy because of how poorly and non-specific the IRS rule is written. I agree that picking stocks, evaluating tenants, vetting borrowers, etc. all are legal performances of an IRA owner. It was the doing work on the rehab for your IRA, doing property management, and other similar things like that I was referring to as prohibited items. The reason I believe performing PM duties for your IRA would be a no no as far as the IRS is concerned is the fact that such an item typically costs 8%-12% of the gross rents. Doing these tasks yourself is far different then simply vetting a borrower which is not an onging performance, just a one time deal and also does not come with similar costs to have an outside party perform such a duty. As such, performing the PM work would be considered contributing to the IRA.

Again, we also agree that owning RE inside an IRA is the poorest use of the IRA funds (in our opinions). So I am of the opinion that attempting these types of investments are just to risky in potential violations of IRS guidelines and as such, why risk it, just use the funds as a lender and avoid such problems and managerial headaches keeping your IRA and you a much more passive and legal investment.

@Jon Klaus - If the other party is a non-disqualified party, you have zero issues, as Jon stated, i was under the impression that you would be partning with the IRA and in that case, you would likely run into problems, however, if you were to perform the property management, I believe you would still run into problems. Managing the rehab - perhaps not, as long as you were simply hiring the contractors and not swinging the hammer, that would be no different than selecting a borrower or picking a broker.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Title Representative · Mineral, Virginia


If I decide the risk of managing property owned by my SDIRA is too great can I, individually, purchase the property at the SDIRA's cost basis?



Real Estate Investor · Garland, Texas


Originally posted by Peter Walther:
If I decide the risk of managing property owned by my SDIRA is too great can I, individually, purchase the property at the SDIRA's cost basis?

You purchase the property from your SDIRA? This is a prohibited transaction.


Jon Klaus, SellPropertyFast
E-Mail: [email protected]
Telephone: 214-929-6545
Website: http://www.facebook.com/Buttermilks


SFR Investor · Wheat Ridge, Colorado


Originally posted by Peter Walther:
If I decide the risk of managing property owned by my SDIRA is too great can I, individually, purchase the property at the SDIRA's cost basis?

Absolutely not. That's a prohibited transaction and is clearly forbidden.


Jon Holdman, Flying Phoenix LLC


Rehabber · Santa Clarita, California


Originally posted by Peter Walther:
If I decide the risk of managing property owned by my SDIRA is too great can I, individually, purchase the property at the SDIRA's cost basis?
that is self dealing and as others stated, a prohibited transaction. You can not buy a property your IRA owns and your IRA can not purchase any property you own.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Title Representative · Mineral, Virginia


Thank you Jon and Will but can you tell me why you belive it is self dealing? Wikipida lists the following as examples of self dealing:

Examples of self-dealing include:
Having your IRA purchase real estate that you own or use.
Issuing a mortgage on a relative’s new residence purchased by a family member who is a disqualified person as listed above.
Granting a child a second mortgage for the down payment on his or her first home.
Buying stock from the account owner involving IRA funds and a disqualified person.
Purchasing stock in a closely held corporation in which the account owner has a controlling equity position.
Purchasing restricted stock from a family member who is a disqualified person listed above.

Equity list the following:

Some examples of “Self Dealing”
Having your IRA purchase real estate that you own presently.
Having your IRA purchase real estate that is owned by a family member of lineal descent, such as your father.
Issuing a mortgage on a relative’s new residence purchased by a family member who is a disqualified person as listed above.
Granting a child a second mortgage for the down payment on his or her first home.
Buying stock from the IRA owner (any transaction involving IRA funds and a “disqualified person” is prohibited).
Purchasing stock in a closely held corporation in which the IRA owner has a controlling equity position or, if such corporation is the IRA owner’s employer, in which the IRA owner is an officer if the IRA is established pursuant to the employer’s SEP or SIMPLE program
Purchasing restricted stock from a family member who is a disqualified person listed above.

Neither list my purchasing an asset from the SDIRA that will not be used for personal use and my research did not find any source that did.



SFR Investor · Wheat Ridge, Colorado


Those are examples, not an exhaustive list. For IRS questions, go to the source. In this case:

http://www.irs.gov/irm/part4/irm_04-072-011.html

In particular, this section:

http://www.irs.gov/irm/part4/irm_04-072-011.html#d0e411


4.72.11.3 (11-01-2010)
Prohibited Transactions

The following transactions (whether direct or indirect) between a plan and a disqualified person result in a prohibited transaction subject to the sanctions of IRC 4975 unless there is an applicable statutory or administrative exemption:

Sale, exchange or lease of any property.

Loans or extensions of credit.

Furnishing of goods, services or facilities.

Transfer to, or use by or for the benefit of, a disqualified person of any income or assets of a plan.

Dealings by a fiduciary with the income or assets of the plan for his/her own interest or account.

Receipt by a fiduciary of any consideration, from a party dealing with the plan in connection with a transaction involving income or assets of the plan.

See IRC 4975(f)(6) for certain instances where a statutory exemption in IRC 4975(d) is inapplicable.

Emphasis added. Notice there is no mention of one direction being prohibited (your buying from you, like in those examples) but the other direction being OK. In fact, the next section says:

The sale, exchange or leasing of property, directly or indirectly, between a disqualified person and the plan constitutes a prohibited transaction whether the transaction was made from the disqualified person to the plan or from the plan to the disqualified person.

Here's the actual text of section 4975:

http://www.law.cornell.edu/uscode/text/26/4975


Jon Holdman, Flying Phoenix LLC


Accountant · Lake Villa, Illinois


@Jon Holdman,

Sorry I missed this thread. I've been a bit busy with the holidays, and attending a wedding here.

You can manage the properties yourself. You should not be providing sweat equity to them.

You have to manage and research a stock portfolio. That is the equivalent of managing your rental property.

You cannot buy a property from your IRA.

-Steven


Small_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660


Title Representative · Mineral, Virginia


Thanks Jon,

I read the IRS reg after I posted my follow up. Obviously I should have done it before.

Peter



Rehabber · Santa Clarita, California


Originally posted by Steven Hamilton II:
You can manage the properties yourself. You should not be providing sweat equity to them.

You have to manage and research a stock portfolio. That is the equivalent of managing your rental property.

This is where some gray area comes into play so i do not fully agree with this statement. One of the many reasons both @Jon Holdman and I preach that holding investment property inside your IRA is not the best use of it is due to this very issue. I would also disagree that managing a stock porfolio is the same or even similar to managing property holdings, it is not. Managing a stock porfolio simply requires some paper research and selection, managing properties requires a lot more hands on things. In speaking to professionals on this topic in the past, it was "recommended" and advised that the hiring of a property manager would keep you 100% clear of any prohibited transactions. For this and many other reasons, holding property inside the IRA is NOT the best use of the IRA funds. While this topic is not necessarily about the best use of funds, it is about the legalities of them and self managing could easily be considered by the IRS as a prohibited transaction, circumstances dependant.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Real Estate Investor · Louisville, Colorado


"If I decide the risk of managing property owned by my SDIRA is too great can I, individually, purchase the property at the SDIRA's cost basis?"

Your only option for taking personal title to the property in a SDIRA is by "distributing" it to yourself. To do that you would have the property appraised and pay taxes on that amount, just as you would with any IRA distribution.





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