Do you Manage a property that is owned by an IRA?
If not, would you like to but are just not sure how?
As a property manager, just knowing the basic rules makes you a valuable partner for your owner. You will find that some owners unintentionally may want to make a decision that will totally cancel out their IRA structure, but if you know the basic rules, you can protect their interests.
All management contracts, deeds, and legal documents must be in the name of the IRA and not the IRA owner’s name. When applicable, documents may be in the name of an IRA/LLC.
For the purposes of determining prohibited transactions through a self-directed IRA, the following people are considered disqualified persons:
- You and your spouse
- Your employer
- Your lineal ascendants and descendants, as well as their spouses (children, parents, etc.)
- Any person providing plan-related services (custodians, advisors, fiduciaries, administrators, etc.)
- Any entity (business, corporation, partnership, etc.) of which you are at least 50 percent owner, whether directly or indirectly
The IRA owner and certain family members (disqualified persons) may not reside or personally benefit from the real estate. That means the owner or family members can never stay at the property nor can you lease to a disqualified person. The real estate must be held for investment. The IRA owners and other disqualified persons may not receive a commission or other personal financial compensation for the IRA’s purchase, management, or sale of real estate.
The IRA owner and disqualified persons may oversee and direct repairs or management of the property through their IRA (or IRA/LLC as applicable) but the IRA owner and disqualified persons are prohibited from physically working on the property.
What if you have an owner that wants to use an IRA to purchase real estate that they currently own. Is that possible? No. This is considered a prohibited transaction (see IRC 4975). You may not purchase a property, or interest in a property, that’s currently owned by a disqualified person. You also cannot use an IRA to purchase real estate that is owned by a Corporation, partnership or LLC in which you are a member or owner.
Ok, so you have a basic understanding of the rules of an IRA. But, how do you pay the rental income into an owners account if they cannot have any receipt of the funds? Rental payments are usually sent to the custodian of the IRA, for the benefit of (FBO) of the owner IRA. The checks or money orders should be made payable to:
“{Company Custodian} FBO
All income generated by an IRA-owned property must return to the IRA. This ensures that a tax-deferred or tax-free status of the investment is retained.
Let’s say you have an owner that wants to renovate their rental. Where do the funds come from? Before any renovations/improvements are planned, the owner needs to make sure that they have enough funds in their rental account or their IRA to cover the expense. The owner cannot contribute funds from their personal accounts ever. If they do, the whole IRA structure collapses.
What about 1099-misc reporting for a Self-Directed IRA LLC? Is a Single Member Self-Directed IRA LLC Required to file a Federal income tax return? No, a single member LLC is treated as a disregarded entity for federal income tax purposes and thus no federal income tax return is required to be filed. Since the member/owner of the LLC is liable for any tax on the profits generated by the LLC, the member/owner not the LLC is responsible for reporting the income. In the case of a single member LLC owned by an individual, the individual would be required to report the LLC income on his or her federal income tax return (i.e. Schedule C or Schedule E). However, since an IRA is exempt from tax pursuant to IRC 408, an IRA is not required to file a federal income tax return. Hence, a single member LLC owned by an IRA will have no federal income tax return filing requirements. For tax reporting purposes, you do not have to issue a 1099-misc to the IRA. However, you do need to have the owner complete a W-9 form. On the W-9 form, in box 3, you would have single member LLC checked and most important, in box 4, the exemption code would be 1. This exemption is what notifies you that they are exempt from 1099-misc reporting, so very important to have this on file.
So, there you have it in a nutshell. Obviously, we are talking about tax law here, so there are myriads of rules and regulations that the owner should follow on their end, but at least you now know the basics and can confidently manage a self-directed IRA owned property!
