December 23, 2020

Can I Manage a Rental Property in my Self Directed IRA?

Most investors know you can invest in stocks, bonds, and mutual funds with an IRA. What some investors are unaware of is that your IRA funds can also invest in alternative assets outside of Wall Street. The most common alternative asset purchased is real estate, with some of the wealthiest individuals making it an integral part of their investment strategy. 


How Do You Buy Rental Property with an IRA?

To purchase any alternative asset (such as a rental property) with your retirement funds, you must have a Self Directed IRA. The IRS requires your Self Directed IRA to be held by a qualified custodian, but you have the freedom to instruct the custodian to invest in the asset of your choice. As long as IRS rules are followed, your IRA may own an income-generating real estate such as commercial and residential rental properties.  

When an IRA owns a rental property, all cash flows are received and paid by the IRA’s funds.  

The IRA is listed on the contract as the buyer of the property. Your property should be titled as follows, “Madison Trust Company Custodian FBO [Your Name][Your MTC Account #]”.   

How Do You Manage a Rental Property Owned by your Self Directed IRA?

Once you create a Self Directed IRA and select a property, you can manage the property in one of three ways.

  1. Manage through a Self Directed IRA Custodian - The IRA custodian is involved in each transaction under this property management structure. When rental income is due, the tenant sends the payment to the custodian, who then deposits the income into the owner’s IRA. If expenses (such as electricity and water bills, remodeling costs, etc.) are due, the IRA owner informs the custodian of the amount and where to send the IRA funds. Since communicating with a custodian for each transaction is typically time-consuming and fee-intensive, investors often choose a different way to manage their rental property. 
  2. Hire a Property Manager - The second option involves the IRA hiring a property manager to perform all administrative duties, including paying expenses and receiving rental income. The property manager typically takes a percentage of the rental income or charges a monthly fee as payment for their services. Hiring a professional property manager can be beneficial, as they understand the rules and best practices of managing a rental property.
  3. Create an IRA LLC - The third way to manage a Self Directed IRA-owned rental property is to invest your IRA into a newly created LLC. The Self Directed IRA owns the LLC and the IRA accountholder manages the LLC. The IRA’s funds are deposited into an LLC checking account and the accountholder is free to write checks to make payments and deposit rental income into this account. This property management structure is the most popular, as it ensures quick access to the IRA funds and provides asset protection. The IRA owner also has more freedom to manage the property, without having to contact a property manager or custodian.  

Important Self Directed IRA Real Estate Investing Rules to Keep in Mind

  • All cash flows must be through your IRA, not your personal funds. Keep in mind IRA contribution limits and make sure your IRA has sufficient funds to pay for expenses.
  • Your real estate investment must be used for investment purposes only and cannot be used for your or your family member’s personal benefit (see prohibited transactions and disqualified persons). For example:
    • If you purchase a vacation rental with your IRA, you cannot stay in that rental when it is not in use.
    • A disqualified person cannot be the property manager because receiving pay for your services is seen as a direct benefit from the investment. 
  • Financing must be through a non-recourse loan and may be subject to UDFI tax.  

Managing a rental property is an investment that can lead to many advantages, but it’s not the right investment for everyone. Make sure to conduct due diligence and consult with a qualified advisor to ensure your real estate investment is set up and managed according to IRS guidelines. 

Got Questions?

Speak with a Self-Directed IRA Specialist.
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