Real estate is the most popular asset for self-directed retirement accounts and is a great long-term investment. Efficient and compliant management of real-estate properties owned by Real Estate Retirement Accounts, particularly when there are multiple owners, can be achieved in several ways, which will be outlined in this post.
How Can I Collect Rental Payments For My Real Estate IRA, Solo 401k, or Defined Benefit Plan?
- Direct payment to IRA Custodian (Solo Ks and DB Plans don’t require a custodian)
- Hire a property manager that will collect the payments and forward them to the IRA Custodian
- Hold the real estate in an IRA-LLC and have payments made to the IRA-LLC bank account
Can I Collect the Rental Payments and Transfer Them to The IRA Custodian?
No, you can’t. Rental payments can’t be made to you, the account-owner, being that you’re a disqualified person to your IRA. If the check is made out to the IRA custodian – not to you – you can accept it and submit it to the custodian.
What if There Are Multiple Owners of the Rental Property?
If there are multiple owners of the rental property and one or all of them are retirement accounts, collecting rent without using a property manager or retirement-account-LLC, can be cumbersome. The process can be simplified by using a property manager that collects a single rental payment and then makes the appropriate distributions.
Better yet, use an IRA-LLC or retirement account-LLC to completely eliminate the custodian’s involvement and reduce custodian fees. With a Retirement Plan LLC, all rental payments are made to LLC and the retirement account owner acts as manager of the LLC. Business as usual!
How Can Investment Property Expenses Be Paid By Real Estate Retirement Accounts?
- Direct payment by IRA Custodian (Solo Ks and DB Plans don’t require a custodian)
- Hire a property manager that will make the payments
- Hold the real estate in an IRA-LLC and have payments made from the IRA-LLC bank account
Paying these retirement account expenses out of your personal funds may be a prohibited transaction under Section 4975 of the Tax Code. All expenses must be paid from your SDIRA, Solo 401k, or Defined Benefit Plan funds. You can have your custodian pay them, which will entail additional paperwork and fees, or use an IRA/LLC structure to streamline your real estate operations. When the property is held in an LLC, all income and expenses are handled at the LLC-level without the custodian’s intervention.
Single-member and multi-member-LLCs can reduce fees and processing time for your retirement account real estate investments, particularly if you’ve got multiple investors. Using a custodian or administrator to handle day-to-day operations can be cumbersome and costly. The key takeaway: don’t use personal bank accounts for SDIRA or Qualified Plan investments.