If I own rental property in a SDIRA, and I have a major expense that exceeds the available cash and also exceeds the annual contribution limit, how do I pay for it? Wouldn't it be a prohibited transaction and/or an unqualified contribution to pay for it personally? Do I need to keep 15%-20% cash in the SDIRA to make sure I can cover a major repair?
paying with the personal funds for the expense on the property owned by your IRA will be prohibited transaction. You have few options:
- Make maximum allowed contribution for the last year and 2018
- Bring in a partner by selling portion of the property to another investor (must be someone who is not disqualified)
- If your IRA owns the property free and clear you can do a cash-out refinance
- Your IRA can get a loan to pay for this expense
The amount you need to allocate for capex will depend on individual investment, it would be different for 70 years old property compared to 15 years old property. You have to do your due diligence including property inspection prior to the acquisition of the investment which will help you decide how much $$$ to allocate.
It is always best to have cash for repairs âin or out of an IRA. However you should also be getting rent coming in monthly to help with expenses. You can also get a non recourse loan from a bank or even another IRA if necessary for a major repair. Some clients have also sold an interest in the property to add money. Some other clients have moved money from other IRAs or 401(k)s if they need additional cash. Some other clients have made excess contributions and paid the penalty while others took out the excess before the end of the year and paid no penalties. There are many ways to correct cash flow problems but one of the easiest is to keep some cash available but many investors always want their money working harder and not sitting on the sideline. An equity line for the IRA property is my favorite.
@Pearce G. you have got some great info from a couple of very knowledgeable members/providers here on BP.
We have done both non-recourse loans through traditional national lenders on properties we own free and clear, and have also spoke to a Private Lender that we use on our non retirement fund properties and have his assurance that he would have no problem doing a private loan on a non recourse basis to our SDIRAs.
That is good that you are planning ahead. Obviously the best course is to leave enough funds in the IRA to cover future expenses.
Unfortunately, when an IRA obtains a loan from a third party (non-disqualified party), the loan must be non-recourse and the borrowed funds have to be used towards the purchase of real estate-not to pay expenses associated with already IRA owned assets.
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