Can I be the property manager for my IRA-owned real estate?
Self-directed investors commonly 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: IRA COMPANY INC, FBO YOUR 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.
Comments (2)
Even if you broker your IRA's real estate transaction without taking a personal commission the IRS could argue that you added value to your IRA. The IRS is scrutinizing self directed IRAs more closely and they are hiring more employees to do so. If you get too close to the third rail an entry level IRS agent whose career path will be enhanced by landing some big IRAs may target your IRA. As the government increases its desire for more revenue your $250,000 - $500,000 IRA may look like a nicer prize. If the IRS targets your IRA you will probably pay significant legal fees if you challenge the decision and will lose even if you win. This area has little case law for precedent. You must ask yourself if the risk is worth it in lieu of the severe penalties involved.
Jeff Rabinowitz, almost 10 years ago
Jeff, do you work for the IRS? You speak as if you have insider knowledge. I can see your argument if you broker your own real estate sale (expense saved) but if you broker your own purchase and take no commission, there is no value added nor expense saved. Furthermore, what if your real estate deal is a FSBO deal and no agents are involved?
Loren Whitney, almost 10 years ago