Repairing and Maintaining Property Owned by an IRA
We have discussed various ways you can invest in real estate using retirement accounts such as 401k’s, IRAs and Health Savings Accounts, and even combinations of these and other traditional financing sources (bank debt, non-retirement capital, etc). Now we are going to explore some key considerations in maintaining a property once a retirement account is an equity holder in the asset.
The most important consideration to remember is that the IRA is the owner of the property, not the individual. As such, the IRA needs to be responsible for maintaining the property and expenses associated with it. For example, the IRA owner and anyone considered a “disqualified person” cannot invest “sweat equity” to maintain or improve the property. “Sweat equity” includes any type of physical labor like demolition, painting, installing fixtures, and other activities. The IRS views this as contributing to the retirement account, potentially bypassing the annual contribution limits, and therefore prohibits the activity.
How then can repairs be made? The IRA owner must hire a non-disqualified person or company to perform the repair or maintenance and pay for the service using IRA funds (not personal money). Using personal funds would be viewed as making a contribution to the tax-advantaged account.
Furthermore, fees related to expenses for the property, such as property taxes, insurance, utilities, and HOA fees, must be handled in a similar way and paid for from the IRA itself. To simplify bill payments, New Direction Trust Company clients can pay bills online using our client portal.
Another important consideration is the way your IRA is notified and billed. Be sure to list your personal address with the county treasurer’s office for tax notifications. If tax notifications or payments due are sent to the IRA custodian, individual account owners may not see them in a timely manner. Similarly, insurance statements, HOA notices, and utilities should be sent to an actively monitored address.
Homeowners insurance deserves special attention. The IRA should be named as the “insured” entity on the policy. Since some insurance companies will only list an individual as the “insured” party, it is acceptable to list the IRA owner as the insured party as long as you also name the IRA as the “loss payee.” That way, in the event of a claim, the insurance company must pay out to the IRA, NOT to the IRA owner.
Enough about expenses—what about rental income? Any type of income generated by the IRA-owned property needs to be payable to the IRA and NOT the IRA owner. Whether you are managing the property personally or have opted for a property manager, be sure to have any income paid directly to the IRA to maintain your tax advantage. NDTCO accepts electronic payments by ACH or wire, as well as physical checks.
Real estate investing using retirement accounts can provide great portfolio diversification for the owner. However, there are a few principles and rules to keep in mind, since the account itself is the owner of the property. If you have specific questions, feel free to learn more at ndtoc.com or contact us directly at (877) 742-1270.