You Asked, We Answered: Real Estate IRAs III
Estimated reading time: 5 minutes
Our monthly webinars are chock-full of information about what IRA investors really want to know. During our webinars, we take the opportunity to not only connect with current and potential investors about their investments, but we also like to take the feedback from webinar attendees and answers their burning questions. Here are some hand-picked questions from real prospective and current real estate investors:
Q: When lending funds out of a self-directed IRA using real estate as the secured collateral, does the administrator (Entrust) need to have the recorded lien on file?
A: Yes, the custodian’s name will need to be on the property if the property was bought using IRA assets. Example of the title: The Entrust Group for the benefit of John Doe Traditional IRA [#Account Number].
Q: Do I have to have an LLC or can I buy real estate with a self-directed IRA directly?
A: It is not mandatory to have an LLC under an IRA. IRA assets may be used to purchase property directly without using an LLC structure.
Q: Can you talk about the logistics of handling cash produced by a property? Does a bank account need to be opened in the name of the IRA?
A: If purchasing property directly using an IRA, the income must come back to the IRA. As an example, some who use a property manager to collect the rental income, the property manager sends the income to the custodian made payable to the IRA as a deposit for posting. Some have the tenants make their rental check payable to the custodian directly as they make monthly rent payments. If it’s an LLC structure, the rent is paid to the LLC. The LLC will need to have a checking account established. The Fair Market Value (FMV) of the LLC will need to be provided to the IRA custodian within the frequency required by the custodian to satisfy IRS reporting requirements. It really depends on the work flow an IRA holder chooses.
Q: So whatever you purchase in your self-funded IRA, you can only take out as a distribution, including silver, gold, etc.?
A: IRAs are tax-deferred accounts that have limitations on what can be used to fund it. It can either be funded by contributions, or transfers from existing IRAs of the same type, or rollover from a previous employer plan. What you can distribute is only based on what amount was used to fund it. Distributions will be reportable under the IRA holder’s name and social security number to the IRS and depending on the IRA type will determine taxation. Distributions may be done in-kind or the assets may be redeemed or sold for cash then the cash can be distributed.
Q: I have an old employer 401(K) that I don't want to roll over to an IRA but I'm considering taking a portion of the funds and doing a real estate transaction. Can I take out only a portion? How do you get compensated?
A: If you are choosing to take a distribution from your prior employer’s 401(k) plan to purchase real estate, keep in mind the distribution will be taxable and possibly a penalty, depending on your age. As far as taking only a portion out, you will need to explore this thought with your previous employer since a partial distribution may not be an option. For the described transaction, Entrust will not be involved in it.
Q: Is it possible to use a non-recourse loan to purchase property through the IRA? If so what changes does it create in the funding/purchase process?
A: Yes, a non-recourse loan may be used by the IRA to purchase property. The percentage of dollars used to purchase the property that is from the non-recourse loan will determine the percentage of income that is taxable if the property produces revenue. The IRA will also need to file an IRS form 990-T to report the taxable amount under the section of the IRS form 990-T (Unrelated Debt Financed Investment). IRS publication 598 is a good source of information regarding this topic.
Q: If I use a property management company to run my investment properties, can I pay my expenses like taxes, utilities, management fees paid directly by the property manager using accrued rental revenue in the account? In other words, my IRA does not have to pay each one of these expenses directly?
A: Yes. By using the revenue of the property as the means of paying the expenses of the property, it is viewed as the expenses are being paid from your IRA since the IRA owns the property. The accounting of the expenses paid will need to be sent to the IRA recordkeeper to show proof that the expenses were paid only from revenues produced by the IRA and not paid by the IRA holder themselves.
Q: If I am a member of an LLC with other partners, can I use IRA money to fund my percentage of the purchase with other investors even if the property has a mortgage, or does the purchase need to be in full without a mortgage?
A: A non-recourse loan can be part of the transaction. Keep in mind however, that the IRA portion of the profit that is attributable to the percentage of the loans will be subject to UBTI (Unrelated Business Taxable Income).
Q: Once you purchase the investment property, can the renter be a niece, friend, or someone you have a close relationship with as long as they are not a direct lineal descendant?
A: Yes, you are correct. As long as the renter is not a disqualified person it is acceptable.
Q: Are there any restrictions when changing from a self-directed IRA to an IRA LLC?
A: A self-directed IRA or an IRA LLC are one and the same. An IRA LLC is merely an IRA investing in an LLC.
For more information regarding self-directed IRAs and real estate purchases and planning, please visit our Real Estate IRA Center.