Last Updated on January 30, 2020
If you use a Self-Directed IRA for real estate investment, you may opt for a property manager to take care of your investment properties. A property manager can be a crucial part for a real estate investor. The responsibilities may include managing tenants and rent to maintaining and/or making repairs. They will also know tenant/landlord laws and can mediate a disagreement. Further, if you are using a Self-Directed IRA, also known as a Real Estate IRA, to invest, a property manager can help you stay within the rules.
Understanding the Real Estate IRA
When use a Real Estate IRA to invest in properties, there are certain things you should be aware of. First, all IRAs must have a custodian. Further, the custodian must allow for alternative investments – in this case, real estate. Next, it’s advisable to have checkbook control of your IRA funds. This means, you don’t need to ask the custodian for permission to make an investment.
Setting up a Real Estate IRA is fairly straight forward. Find a custodian, such as IRA Financial Trust, that will set up your plan. Then, fund the plan. Generally, it’s funded with other retirement plan money that can be rolled over into your new IRA. You may also contribute to the plan as well. A limited liability company (LLC) is then created and the IRA funds will be invested in it. You now have the freedom to invest in real estate and take advantage of the tax benefits of an IRA.
What Should a Property Manager Know?
If you do choose to use a property manager with your Real Estate IRA investments, there are few things they should know:
Who Owns the Property
First and foremost is knowing who owns the investment property. The answer is: your IRA. You, the investor, own the IRA, but the IRA owns any investment made with it. According to IRS rules, only the IRA can benefit from an investment, not the IRA holder (more on that later). Therefore, any rent received, or funds from the sale of a property, must go back into the IRA. You can’t take a rent check one month and deposit it into your personal bank account.
Expenses Must be Paid from the IRA
Just like money received for your IRA investment must flow back to the IRA, all expenses must be paid with IRA funds. Expenses may include escrow fees, insurance, maintenance and other miscellaneous fees. Moreover, this includes any repairs that the property may need as well. It’s important that you have cash in the IRA to cover all expenses. You should never use personal funds in conjunction with IRA funds. If you don’t have sufficient cash in your IRA, you can either contribute/roll over funds or sell another asset in the account.
Beware of the Prohibited Transaction Rules
As we’ve mentioned several times already, the IRA is the only thing that can benefit from your investments. You, as the Real Estate IRA holder, nor you close relatives, cannot benefit from the IRA. Included in these disqualified persons are yourself, your parents, grandparents, children, grandchildren and their spouses. No disqualified persons can benefit from the Real Estate IRA investment. Therefore, your property manager cannot be a close relative.
Here are some examples of prohibited transactions with an IRA Real Estate investment:
- You hire your father as the property manager
- You vacation at your beach house rental
- You rent out your condo to your son-in-law
- You hire your grandchild to mow the grass
These transactions are allowed:
- You hire your uncle as the property manager
- You rent out your apartment to your sister
- You hire your brother-in-law for a roof repair
- You rent out a hall to your wife’s best friend
Having someone outside of your family to manage your properties is the best way to keep transactions at “arm’s length.”
Work Together with a Property Manager and IRA Financial
Together, IRA Financial and a property manager can help your Real Estate IRA investments run smoothly. We’ll make sure you stay within IRS regulations and your property manager will ensure your investment(s) are making you money!