Finance Wanted.: Prudently Managing Expenses and Restrictions for IRA-Managed Real Estate

Prudently Managing Expenses and Restrictions for IRA-Managed Real Estate

23.3.08

By Tj Valenzuela

Through a special type of individual retirement account (IRA), you can own and manage real estate as part of your investment strategy. This self-directed IRA gives you a lot of control over where and how your retirement monies are invested, with few limitations. There are still rules about how the investment properties can be managed, both for selecting and letting the property and for paying for routine expenses.

Trust Administration Services specializes in self-directed IRA investments and addresses some common issues with using a self-directed IRA for real estate investing here. A trusted financial advisor can help you determine an effective and specific property management strategy so you get the optimal return from your IRA.

Purchasing within the Rules

There are few limits on what can be purchased as an investment for your self-directed IRA, but unwisely selecting a property out of bounds can lead to tax liabilities and penalties. The rule of thumb for the restriction on real estate owned by your IRA is this: The property cannot be for your personal benefit.

"Personal benefit" ultimately means that the property has to be independent of your personal assets and purchased solely for investment:

It can never have been owned by you or a family member.

It cannot be rented, leased, or used by you or a family member while it is held by the IRA.

All costs associated with the property must be paid directly by the IRA, not by you.

This last restriction is especially tricky because it prevents you from paying for an expense (like repairs or landscaping) out of pocket and then receiving a reimbursement from the IRA funds - and that can be a difficult distinction to maintain unless you have a sustainable way to manage the property.

Meeting Expenses

One of the rules about IRA-held real estate is that all expenses associated with the property must be paid from the IRA fund directly to the third party. This means every kind of property expense - taxes; maintenance, repairs, and improvements; appraisals; fees and dues; and insurance.

Since the IRA is responsible for all expenses, your IRA must have sufficient funds to cover all of the expenses from the current balance, from income from the property, or from making yearly contributions. None of the expenses for the real estate can be paid out of your pocket, so managing the property means that you have to actively work with the IRA administration to pay for routine costs. Determining the amount of property expenses and the demands on the IRA funds is an important consideration for you to work out with a financial advisor like Trust Administration Services.

There are two major strategies for managing the property:

You handle most transactions (in conjunction with the IRA administrator)

You use a property management group.

In the first, you retain control over the property, such as finding tenants and negotiating with contractors. You can either contact the IRA administrator every time there is an expense or authorize the IRA administrator (like Trust Administration Services) to pay for expenses. On the other hand, an agreement with a property management group may add extra expense but it also simplifies the managing the property and makes it easier to comply with IRA regulations. The property management company pays expenses and works with contractors, finds tenants, receives payments, and signs contracts on your behalf.

Making Decisions

As you begin planning your self-directed IRA investments, be prepared to ask Trust Administration Services, a lawyer, or another advisor some clear questions so you get the best retirement solution: