When buying real estate with your IRA, there are income and expenses that come along with the property. Having worked in the self-directed IRA industry, previously as a Cash Control Manager and currently as a Senior Operations Manager, I have seen almost every type of income and expense related to a real estate IRAs. Some that stand out are: Arby’s, Jack-In-The-Box, and McDonalds (I must be hungry). Here are a few tips and pointers on how to make payments and receive income for your real estate IRA.
The most important thing to remember is that all income and expenses for an IRA-owned property must be processed through the IRA. These funds must not mix with personal funds— this can have serious consequences for your IRA. Income must be deposited to your IRA Resources account and not in a personal account, or this can result in a tax penalty.
The income for your real estate IRA will likely be from rent. You must tell your tenants to make checks payable to IRA Resources for the benefit of your account. You can receive the check first for confirmation before forwarding to IRA Resources, or you can have your tenant send the rent check directly to us. The payee on check should read: IRA Resources FBO [your name, your account number]. This lets us know these funds are yours and to place them in your account.
When IRA Resources receives the income, rental or otherwise, they are deposited into your account. This allows your IRA to grow capital for a future property expense or to purchase another asset. This account continues to grow in a tax-free or tax-deferred status, depending on the type of IRA you have. This means that you do not need to pay taxes on the income your IRA receives.
If you have an IRA LLC, income is handled a bit differently. The income would go into the checking account that was established for the IRA LLC. In this case, the LLC manager would be responsible for depositing rental payments into that account. If you personally decide to manage the LLC, you are not to be compensated in any way. Remember that taking payment from the IRA’s income for managing the LLC or for any reason might be considered a prohibited transaction which could lead to substantial taxes and penalties. As stated earlier, it’s important that your personal funds are never combined with your IRA funds. This will jeopardize the tax status of your IRA.
Your annual IRA contributions should not be deposited to the IRA LLC checking account. These should be deposited directly into your IRA Resources account and used to additionally invest in your IRA LLC. This is so we can report the contribution properly to the IRS.
When you invest in real estate, you need to consider the ongoing expenses associated with buying your property. In addition, you need enough cash in the IRA account to cover expenses after the purchase. Here are some of the most common expenses associated with a real estate IRA:
- Home Owners Association (HOA)
- Business License Registration (if in an LLC)
- Pool Service
- City Tax
- Property Tax
- Loan Payments
- UBIT (if applicable)
- Property Insurance
- Property Manager
- Garbage/Sanitary Service
- Water & Electricity
To pay for an expense you would complete a Payment Authorization Letter and fax or email it to IRA Resources, so we can make the payment on behalf of your IRA. Be sure to include a copy of the bill or statement as documentation for your payment request. You should not make a payment from personal funds— the IRA cannot reimburse you, because a payment made out to you from your IRA can be considered a distribution and taxed.
If your investment is in an IRA LLC, the payments will be paid from the checking account created for the IRA. If the checking account for the LLC is running low in funds and you have cash in your IRA Resources account, you can request an additional funding to the LLC with a Buy Direction Letter.
Splitting Income and Expenses with Partners
Some of our clients partner with others or even with their own personal funds. This means that all income and expenses must be split based on percentage of ownership. For example, let’s say you decided to partner with yourself (personal funds) 50-50. You would instruct your clients to make two rent checks, one payable to you personally, one payable to your IRA based on a 50-50 split. Because this can become a hassle for clients and an inconvenience for tenants, clients use property managers to collect the payment and have the property manager send out income according to percentage of ownership. Usually the property manager sends us a statement along with the rental check showing the breakdown of payment.
When a client partners with others’ IRAs or personal funds the payments must be split based on ownership percentage. In some cases, certain types of payments need to be coordinated. For example, government agencies that collect property tax, city tax, and business license registrations will require a payment to arrive in full and will not take partial payments. In these cases, we encourage all owners to coordinate a payment to be mailed in a single envelope. This will help avoid delays in processing and associated late fees. We make this process easier by being flexible in our approach and working with individual clients. We are open to collecting the payments forwarded to us (with instruction) to be sent with the payments from the IRA. We are also open to forwarding the IRA payments to the account owner or IRA partner to ensure all payments can be delivered simultaneously.
The process for receiving income and paying expenses for your IRA is not too complicated. Always remember to keep enough cash in your IRA to pay for expenses, do not co-mingle funds, and plan ahead.
If you have any questions regarding real estate IRAs, please give us a call. We have been helping clients invest in real estate with their IRA for over 21 years, and we’d be happy to answer your questions.