Rental Property Purchased with IRA

[Tom Hertz]

I would like to purchase a property with funds from my IRA to use as a rental property. I know there are rules regarding who I can and cannot rent to (like family members). I would like to do a lot of the management of the property myself (renting it, maintenance, upgrades, etc). From what I have briefly researched and read so far, it sounds like I can do this if I establish an IRA LLC, is that correct? Do I want to set up an IRA LLC, a Solo IRA, a Checkbook IRA, or are these all one in the same?

Thanks 

[Brian Eastman]

@Tom Hertz

The format you choose has no impact. Whether you have an IRA account held by a trustee or the IRA LLC or the Solo 401k, the IRS guidelines are still the same.

The issue is that you may not add value through the provision of goods or services to the plan.  See IRC section 4975 for the specific language surrounding disqualified parties and prohibited transactions.

Some folks will interpret what "adding value" means differently.  An extremely conservative view would be don't do anything and hire a property manager.  An overly liberal view would be that you can perform "maintenance" work on a property, but nothing that adds value such as upgrades.  

Based on our many years of experience and the guidance of our tax attorney who has been specializing in the specific area of retirement tax law for more than 20 years, we take a reasonably conservative approach that you can do the administrative side of things like signing leases, paying the bills and collecting rents, but should not get hands-on with the property.   

The IRS has a lot of leeway to make a determination of a particular situation in the event they choose to audit what you are doing.  If you have a lot of expenses from the hardware store and no labor expense to install those materials, they would probably assume you are doing the work yourself, and could decide to call that a benefit to the plan worthy of a prohibited transaction... or not.

BUT...  the penalties for engaging in a prohibited transaction are severe.  There is no point in taking that risk when you can hire a painter, handyman or landscaper for a minimal fee.  If your deal only makes money because you are putting in sweat equity, you need to find better deals.