Self manage STR through checkbook IRA?

Question

Hi all,

New here and looking into investing in short term rentals but have lots of questions. I have $140,000 in a ROTH that I would like to convert into a checkbook IRA and self manage both the ROTH and the properties.  As I understand the process I would need to-

-Form an Llc in the ROTH with me as sole and managing  member

-Open a bank checking account for Llc

-Finance through non-recourse loans only

-Never do anything that would benefit me (only my ROTH)

Questions are as follows:

1) Due to severity of penalties, should I move entire amount, or only what would be needed to secure loan(s) for properties and keep another IRA?

2) Is there a way to move money back and forth between IRAs if needed? (All are/ would be ROTH)

3) Can I legally self manage the properties?

4) If so, to what extent? I am not looking to do cleaning/ maintenance activities but booking, coordinating maids, handymen, contractors.

I am sure to have many more questions but would like to thank you in advance for your time and advise.

Roger Deweese

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Brian Eastman · Answer

@Roger Deweese

A Checkbook IRA as you describe is definitely best for any type of investment with frequent transaction activity.  Relying on the processing services of a 3rd party for all expense and income transactions can become quite frustrating and expensive when you add up the paperwork, delays, and per-transaction charges.

Your acts of managing the LLC itself are acceptable, so long as in doing so you adhere to IRS rules related to self-dealing.  Think of yourself as a fund manager and you are OK.  Start acting like the manager of investment assets and providing meaningful services to the IRA and you can get in trouble.

With STR, you would absolutely want a 3rd party providing property management.  The scale of interactions is just too high.  For a long term rental, you are probably safe signing a lease, collecting rents, calling out a handyman as needed, and paying the bills for things like property taxes, insurance, etc - all through the vehicle of the IRA-owned LLC, of course.

Short terms rentals are a problematic concept for a SDIRA.  At issue is whether this is considered passive rental income which would be sheltered within an IRA (like schedule E in the after-tax world) or services income that would be taxable as Unrelated Business Taxable Income (like schedule C in the after-tax world).  The dividing line can be a touch gray, so speak with a tax professional.  If there are any meaningful services provided to visitors, more akin to a hotel or B&B, then there is risk of UBTI exposure.  You may also need to factor in sales and/or local hotel taxes into your projections.

As to the prior comment about turning capital gains income to regular income when investing with an IRA... true, but entirely irrelevant.  When your IRA invests in just about anything this happens.  The power of the IRA is sheltering from taxes on income as it is earned, so the value of the account grows more than it would if being taxed.  The compounding effect of a tax-sheltered vehicle is the benefit.  So, if an IRA investing in real estate produces a better mix of risk/reward than the IRA investing in something else, real estate is the right choice for the IRA.  Comparing the performance of real estate (or most any asset) inside vs outside of an IRA is comparing apples and oranges.  Of course in your situation with a Roth IRA, that point is moot as @Carl Fischer noted.

Carl Fischer · Answer

@Roger Deweese

With a Roth there is no taxes so you are not trading LT capital gains for ordinary income. You are trading LT capital gains tax for tax free income-You get it all- that is my favorite part.

Carl Fischer · Answer

@Roger Deweese

#1 is a yes if it were me. #2 Yes -you can do all the transfers you want back and forth. #3 is troublesome for me. I also don’t think you or another disqualified person should be the manager even though Swanson vs. IRS said it was ok. it is touchy because “manage” is not well defined. Doing sweat equity is definitely  prohibited. Picking contractors could be a kin to doing research and picking stocks which is not illegal. I just don’t want to prove my innocence to the irs. There is not a lot of precedent on the subject in my opinion.

Bill B. · Answer

#3 is a solid no. You can not provide any service to the property. They’ll treat it like you cashed it out with all the relevant taxes and penalties.

Try to find non retirement money otherwise you’re turning capital gains in to regular taxable income.

Real estate makes a great compliment to retirement funds but the sum is not greater than the parts when combined.