Due to the popularity of our last Real Estate IRA Q&A article, we’ve decided to address more questions from real attendees of Entrust’s webinars. Real estate is not only the most popular asset held by our clients, it’s the most popular investment for all American self-directed IRA holders, with $7 million invested. Whether you’re already investing in a rental property or interested in purchasing a commercial building with an IRA, you’ll want to continue your education by reading this article to increase your chances of successfully investing in real estate.
Q: Is it possible for me to get a loan with a personal guaranty to buy a rental house with self-directed IRA?
A: No. This is viewed as an extension of credit by a disqualified person (the IRA holder) to the IRA. This is considered a prohibited transaction under IRC 4975.
Q: To whom does a tenant make out a rent check?
A: Since the IRA owns the rental property, rent checks must be made out to the IRA. For example: “Entrust FBO, John Doe Traditional IRA”
Q: If I own 15 percent of the investment property, with my IRA owning the other 85 percent, can I pay for some of the expenses out of pocket?
A: Since the IRA owns 85 percent of the property, you (the IRA holder) as a disqualified person technically may not engage in paying for fees on behalf of the property out of pocket. Expenses for the IRA investment must be paid by IRA assets.
Q: We did not know we could not do repairs on the property held by our IRA. Now that we know, is there any way to remedy the fact we did all repairs over the last 4 years?
A: Unfortunately there is no remedy for having engaged in a prohibited transaction under an IRA.
Q: I know that two people can partner their IRAs to acquire an investment property. Can those people be married when the IRAs are separately held in each respective spouse’s name?
A: Purchasing a piece of property together may be tricky. Although not challenged in court, most legal firms state that as long as the purchase of a third party property is purchased simultaneously by two disqualified persons, it does not violate the prohibited transaction rules. The issue, however, is contributing additional cash, for example, to pay for expenses such as maintenance (e.g., new roof, new appliances). Once the purchase is executed the property becomes a disqualified entity since it’s owned by a family member. Subsequent transactions could be prohibited. Although the initial transaction may not be an issue, if you’re not careful, subsequent transactions may be problematic.
If you do not see an answer to your question, we regularly post answers to our Twitter and Facebook pages with the tag #AskEntrust. Otherwise, we encourage you to leave any additional questions about Real Estate IRAs in the comments section below so other readers may benefit from the answers. Or contact one of our trained professionals for a quick chat.