Beneficiary Self-Directed Realestate IRA question

10 Replies

Hello,

I'm brand new here, and I have a question that I can't seem to find the answer for due to its unique situation. 

I'm now the owner of a Beneficiary Self-Directed Realestate IRA. The IRA contains one rental property and cash.

Per IRS rules I am not allowed to put money into the beneficiary IRA. I do receive rent money for the property via check, into a separate checking account not tied to the IRA. My question is what do I do with the rent money? Do I still place it back in the beneficiary IRA(which I don't think I can do)? Do I place it in a new IRA? Pocket it?

IRS Publication 590-B:  Inherited from someone other than spouse.

If you inherit a traditional IRA from anyone other than your deceased spouse, you can't treat the inherited IRA as your own. This means that you can't make any contributions to the IRA.

Since it is a beneficiary IRA, I will have to take out a minimum distribution per IRA rules as a non spousal IRA beneficiary by the end of the year 2018. Eventually the distributions will exhaust the cash, then it gets even more complicated, especially if I'm unable to put rental income back into the IRA.

Travis, welcome to BP and congrats on the first forum post!

The rent from the property owned by the IRA must go back into the IRA. You are not allowed to take the rent and deposit that into your personal checking account. There must be a custodian who holds the property title, the rent should be issued to the custodian and they are responsible for crediting your inherited IRA account. Then you take the distribution from the custodial account.

You must plan for RMD, depending on how much cash you have left, the amount of RMD and the net income (rent minus expenses) you may run out of cash. You don't want to be in a situation one day when there is zero or negative balance in your IRA. Possible solutions might be selling the property, bringing on a partner (selling portion of the property), or taking in-kind distribution of a portion of entire property. 

Dmitriy, thank you for responding. So Rent money is not considered a contribution for a real estate IRA?

I do have a custodian of the IRA that I can send the rent to.

As for the in-kind distribution, I don’t think I’m ready for the in-kind distribution yet, but I do like the option.

@Travis Christman

Rental income is considered profit or return on your investment. As @Dmitriy Fomichenko said the rental funds must go back to the IRA. Contact your custodian and explain to them that you have a rental property in a beneficiary IRA. Ask them how do you send the rental income back to them.

Travis, few other details will help clarify your situation:

1) When did you inherit the IRA?

2) How the rent checks were handled prior to you inheriting the IRA?

3) Is there a property manager in place?

Dmitriy,

Travis, few other details will help clarify your situation:

1) When did you inherit the IRA?

It transitioned over to me in March

2) How the rent checks were handled prior to you inheriting the IRA

They went directly to the deceased, who then made a once a year rent deposit to the IRA at the end of the year.

3) Is there a property manager in place? Yes due to city landlord laws.

Travis, 

What the deceased did (and what you are doing) is in violation of the IRS rules. As I mentioned earlier since IRA owns the property all rents must go directly to the IRA and all expenses related to the property must be paid from the IRA.

Wwho is the custodian of the IRA?

And that is why we have this forum. 

I do not feel comfortable saying who the custodian is, However; it is one of the self directed brokers in this space. And if they were easy to work with I would not be asking my questions on the internet.

How things were handled previously with the deceased owner of the IRA is how it was handled.

From what I see in the system. The custodian allows rent payment from their system. There is a pull down for rent deposit, when you submit deposits.

It appears that I might be in breach, since I had no idea how this instrument worked until now. Uncertain if I can update to have rent sent to the IRA, and if they will accept the rent money. Since my main question was answered that I should have rent money go into the beneficiary IRA, since rent money is not considered a contribution. I'll see if I can go in that direction.

Worse case scenario convert IRA in-kind-distribution-and pay the taxes/penalties on the conversion.

Travis, if the IRA owns the property the property manager must issue check to the owner, and the custodian must accept it and credit it to the account. I suggest that you started doing that with the next rent payment. It is also unclear to me how the rent was reported at the end of the year by the property manager. They are required to send a form 1099-MISC to the owner, which is custodian FBO the deceased. If they make payments to the deceased and issue 1099 to someone else - they are also in violation...

You are doing the correct thing by trying to educate yourself and follow the rules, but you should not hesitate sharing the name of the custodian so other's can be aware of this also. 

Thank you all for your input. I'll be reaching out for legal help on this, to see what my options are. I read about Self Directed IRA's and real estate. Most of the forums say to avoid it.