Entrust has been in real estate for over three decades, and we’ve had the opportunity to see how important property management professionals and companies can be for real estate investors. Having real estate in a self-directed IRA has many benefits, especially if the property is an income-producing property. Although there are ways for IRA holders to manage the property themselves, many choose to hire the expertise of a property manager to manage the property. This is not only to protect themselves in the process of finding good tenants, but also to avoid violating the IRA-prohibited transaction rules and avoid dealing with a disqualified person. When it comes to transactions involving your self-directed IRA, disqualified persons cannot directly or indirectly furnish goods or services to the IRA. For this reason, property managers play a vital role in Real Estate IRAs.
At Entrust, we take pride in educating all types of investors and professionals who can benefit from understanding how Real Estate IRA property management works. In this article, you will find tips for property managers to increase their understanding of these types of arrangements to attract IRA holders in using their services:
- The IRA owns the property and not the IRA holder themselves.
It’s important to keep in mind that all rent checks in a Real Estate IRA must be paid back to the IRA and not the IRA holder. For example, the IRA holder would make their rental checks payable to The Entrust Group Inc. – FBO [client legal name], Account # [account number] (e.g., The Entrust Group, Inc. FBO John Smith Account #12345). All tenant contracts must be between the IRA/property manager and tenant.
- All fees and expenses must be paid from the IRA.
Any expenses related to the investment, including escrow or deposit funds, maintenance fees, insurance, and repairs must be paid directly from the self-directed Real Estate IRA. This means the IRA must have sufficient cash to pay these amounts. If there is a lack of funds, the IRA may not pay expenses out of pocket and the account holder needs to maintain a certain level of liquidity/cash in the account. If there is insufficient cash to cover property expenses, the IRA holder has the option to rent the property, transfer funds from another IRA, make a contribution, or liquidate other IRA assets to pay for the expenses.
- Services performed on property must be at arm’s length.
The IRA holder may not participate in maintaining the property, nor perform services. Disqualified persons are also prohibited, which include the IRA holder, his/her parents and grandparents, spouse, children, grandchildren and their spouses.
Here are some examples of prohibited transactions:
- Sale, exchange or leasing of a property between an IRA and a disqualified person
- Extension of credit or cash loan between an IRA and a disqualified person
- Furnishing goods, services, or facilities between an IRA and a disqualified person
- Transfer of IRA income or assets to, or use by or for the benefit of, a disqualified person (Example: Renting a property owned by your IRA to your child)
- Establish a relationship with the IRA custodian/trustee.
As a property manager, it’s important to know the services provided by the custodian/trustee and it’s advised to keep their contact information on hand for any issues or questions that may arise. Property managers will work closely with the IRA custodian to remit rental checks. It pays to know how to title checks payable to IRA (see tip 1).
- Make it easy for IRA holders to do business with you.
Some custodians/trustees provide education, and we highly advise property managers to utilize educational resources on IRA rules from either their website or the IRS. Property managers should research vendors that would accept payments via methods available through custodian/trustee. In addition, property managers or companies can forecast potential property expenses/fixes to avoid surprises for the IRA holder. Lastly, be diligent about knowing your market-reduce property vacancy and list your services in writing with fees.
Knowing these tips will help you avoid surprises when engaging with IRA-owned income producing properties. Take advantage of the tools and education provided by some custodians and trustees and establish a certain level of expertise to show your value as a property manager. Not only will they handle finding qualified tenants, making repairs, and responding to emergencies, they’ll also add a layer of protection between you and your IRA possibly conducting a prohibited transaction. And that’s icing on the cake.
For additional information about Real Estate IRA property management, visit The Entrust Group.
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