SDIRA Rental Income

[Ramsey Howard]

Quick question, purchasing a long term rental through a sdira, how exactly does the rental income get back in the ira? Obviously I haven't set this up yet as I would probably know the answer, just thinking ahead. 

[Brian Eastman]

@Ramsey Howard

There are two self-directed IRA business models.

With a custodian such as Equity Trust, they are the processor. They are doing essentially the same thing as a brokerage, but have the paperwork to deal with non-traditional, more individualized assets such as ownership of real estate. The property is titled to the IRA. The custodian pays all bills and receives all income. There are fees based on the asset value of the account and/or the processing work being done.

An alternative is to establish what is referred to as a checkbook IRA LLC. This model is generally better suited for more time-sensitive and transaction intensive assets such as rental properties. In this structure, an IRA with a self-directed IRA is the starting point, but that IRA is then invested into a specially crafted LLC - thus a one-time transaction from the IRA. You can be the non-owner manager of the LLC and conduct the affairs of the LLC. You will establish a business checking account in the name of the LLC, and this account is funded when the IRA invests in the LLC. You then vest title to property in the name of the LLC and can self-administer the property such as paying the bills and collecting the rents - with all of that activity flowing through the LLC accouint.

There is also a similar program known as a Solo 401k that is available for folks who are self-employed and have no employees.

Regardless of the structure, there is limited oversight over each and every in/out of funds. Like most things related to the tax code, we are expected to follow the rules, and there is the audit process to encourage us to do so. The reporting is done via the IRA, but only beginning of year value, end of year value and IRA layer transactions like contributions/distributions/transfers are reported.

With any of these tools, you can make decisions and deploy the IRA capital into investments of your choosing, but everything needs to be done at arm's length. You cannot benefit from the IRA personally in any way, other than by investing in a fashion that produces better results for your long term savings.