You Asked, We Answered: Top 10 Self-Directed IRA Questions from 2018
Estimated reading time: 4 minutes
For the last webinar of 2018, we discussed the top 10 self-directed IRA questions which have been frequently asked throughout the year. Participants who joined our free webinar had the opportunity to ask our Business Development Manager, Mindy Gayer, questions regarding anything from the basics of self-directed IRAs to more advanced questions about investing in LLCs, partnering your IRA, and more. Continue reading to see what types of questions were answered...
Q: Can you explain how you can live in an IRA-owned property by taking distributions based on FMV?
A: Prohibited transactions only apply when a disqualified party (e.g., the IRA holder) engages with the IRA investment. As and example, an IRA holder cannot live in a property that is held under their IRA. However, once the investment has been distributed out of the IRA, the IRA holder can use the investment for personal purposes.
Q: Can you explain Unrelated Business Income Tax (UBIT) from financed properties?
A: IRAs that borrow money to purchase an investment must pay tax on the income received based on the amount borrowed. As an example if an IRA borrowed 50% of the funds used to purchase a property under their IRA, 50% of the income received by the investment (e.g., rental property) will be taxed even though the investments is under their IRA. The tax is reported using the IRS Form 990-T. This is prepared by the IRA holder and filed under the name and EIN of the IRA.
Q: Can I manage the LLC that owns the property purchased by my self-directed IRA?
A: Although there is no tax law that specifically states that an IRA holder can mange an LLC the IRA owns, here is a court case “Swanson Case” that most IRA holder rely on to prove this possibility. You IRA Custodian is not responsible to adjudicate investments under your IRA so it is best to consult with your tax or legal advisor before proceeding.
Q: Can I use my self-directed IRA for a down payment of a property?
A: An IRA holder cannot extend their own credit to purchase a property held under their IRA. If the loan is a regular loan, using the money from the IRA as a down payment would be problematic. If the loan is a non-recourse loan then the IRA assets could be used as a down payment to purchase a property. Keep in mind most non-recourse loans require a higher level of down payment.
Q: I'm buying a property with a self-directed IRA in partnership with a friend. Can we rent the property for income?
A: Yes, a property held under an IRA can receive rental income. As a matter of fact, the income received by each partner based on their ownership will not be taxable if the partner is an IRA.
Q: If my current LLC owns a property, could my IRA LLC hold a mortgage on that property for the buyer (not disqualified)?
A: An IRA and investment under the IRA (LLC) can engage with non-disqualified parties.
Q: Can I move money from my work 401(k)/403b to a self-directed IRA or do I have to wait until I leave/retire?
A: To move your employer-sponsored plan to an IRA, you must have reached a trigger. Each plan has its own sets of triggers. Examples of common triggers include, separation from service, death, disability and plan termination. Ask your plan’s administrator if you have reached one of the triggers to make sure you can move assets out of your retirement plan.
Q: If I want to flip a house, can I do any of the work on the house myself (i.e. painting, cutting the grass, drywall replacement)?
A: Unfortunately, performing services on behalf of a property owned by your IRA will constitute a prohibited transaction.
Q: If I purchase real estate to be used as a rental property, do I have to pay for the property in-full with the self-directed funds or can I get a mortgage on the property and pay the 20-30% down with the self-directed funds?
A: A loan can be obtained to purchase a property using your IRA. The loan must be a non-recourse loan since it’s the IRA that will be purchasing the investment and not you personally. There are several entities including banks the offer non-recourse loans to IRAs.
Q: If the Roth IRA owner dies, what happens to the Roth IRA? Does the beneficiary have to take the money?
A: Beneficiaries that inherit a Roth IRA have options on how slowly they wish to deplete the account they have just inherited. Of course taking the full amount is always and option. Most beneficiaries however consult with their tax advisor to determine which option they wish to take. Slowly depleting the account means the investments remain tax deferred while sitting under their beneficiary account.
Q: Can you use non-recourse loans for tax deed investments?
A: You may but you will need to check with the lender to see if they will underwrite such an investment.
Q: If you purchase real estate to be used as an Airbnb investment, are you allowed to confirm bookings/communicate with individuals who are renting the property?
A: Performing services on an investment under your IRA is typically prohibited. However, although it has not been challenged in tax court, can an IRA holder provide direction within a website to approve or disapprove an Airbnb renters and communicate directly? You may choose to consult with your tax or legal advisor before proceeding.
Thank you to everyone who participated in our national webinar. We encourage our readers to post any additional questions regarding self-directed IRAs or retirement planning in the comments section below. You can view the full recording of this webinar here to get answers to questions which are not listed in this article.