BiggerPockets

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.

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.

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?

@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 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.

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.

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?

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

Thanks Jon,

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

Peter

"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.