Can I Manage an IRA LLC Owned Property?

By Jordan Sheppherd

Here is a question I received the other day from a prospective client about using a CheckBook IRA LLC to invest in rental property, and how his role as Manager of the LLC fits into his ability to manage the property:

Hi Jordan,

I plan on buying two rentals in my area, and I was wondering how it would work as far as managing the properties.  Can I collect the rent checks?  How would it work when I kick a renter out and move someone else in?  Would it be prohibited for me to work on the house?  I guess I’m not clear how much I can do as the Manager of the LLC.

Best Regards, Tom

This is a good question, and one we get a lot.  If you’re planning on buying rental property, it is important to understand your role as Manager, and to what extent that allows you to do certain things without running afoul of the prohibited transaction rules.

There are two things to look at when discussing this issue.  Firstly, the Manager of the LLC is (generally) also the IRA owner, and therefore a prohibited party or disqualified person to both the IRA and LLC.  Secondly, because the Operating Agreement of the company sets out certain powers and responsibilities to the office of Manager of the LLC, there is a fiduciary responsibility of the Manager to the LLC that must be taken into account as well.

In light of the two points in the preceding paragraph, here is the question we must answer:  As the IRA owner, you can’t have any dealings with the LLC, nor can you personally benefit from any actions of the LLC.  On the other hand, you are the Manager of the LLC, and as such have certain powers given you by the owner of the LLC to operate the company and direct the investments.

Let’s use two examples:

Example 1
A property owned by Tom’s IRA LLC is thrashed by the renters.  They punch holes in the wall, tear up the carpet, and their bratty kids write all over the walls with crayons.  After Tom figures out what is going on, he kicks them out of the house.  He puts an ad up on Craigslist for a new renter, but in the meantime he needs to do some work on the house to get it back in rentable shape.

Question
Could Tom roll up his sleeves and patch the holes in the wall, paint the walls, rip out the carpet, and replace it himself?

The answer here is a pretty obvious no.  The repairs needed here are large in nature, and will require a large amount of time and effort to complete.  This kind of work is necessarily beyond the kind of responsibilities of the Manager contemplated in Tom’s IRA LLC Operating Agreement.  Consider his position if he wants to do the repairs himself: if he completes the repairs himself, he can’t be paid because he is a prohibited party to the LLC.  On the other hand, if he isn’t paid by the LLC for those repairs, he is gifting his labor to the LLC in the amount of whatever the LLC would otherwise have had to pay a contractor or other party to do the work.

Example 2
Tom’s IRA LLC owns another house across town that is occupied by a young couple.  The young couple are model renters, and have always paid on time and kept the property clean and well-maintained.  Tom receives a call from the young couple informing him that they have both accepted a job in a different State and must therefore move.  After the couple move out, Tom inspects the house and finds it to be in good order with two exceptions: the lawn needs to be mowed, and two lightbulbs have burned out.

Question
Can Tom mow the lawn and replace the lightbulbs?

Yes.  These are the kinds of actions that fall well within Tom’s role as Manager.  Tom is not going to re-roof the entire house, or spend two days re-grouting the tile in the bathroom and kitchen.  Instead, he will spend probably a grand total of 20 minutes mowing the lawn and replacing the bulbs.

Conclusion
The best I can say on this issue is to read through those two examples again, and note the pretty obvious distinctions.  Once you understand the basic concept, use your common sense going forward.  The IRS does not want you personally benefitting from what the LLC does, nor do they want you gifting a bunch of time and labor to the LLC.  For you sweat-equity people out there, the CheckBook IRA LLC is not a good vehicle for doing that sort of thing.  If you set something like this up, you’ll need to make sure that your role in the management of the property is administrative only – you can’t be out there digging post holes for the new fence around the property.

The other important thing to mention for those of you who already have an IRA LLC, but didn’t set it up with us – make sure you review the Operating Agreement of the LLC to ensure it has been worded correctly regarding the powers of the Manager.  Everything in this post should be taken to apply to our clients and the way we word our documents.  Obviously, I can’t speak to how anyone else’s IRA LLC has been set up, or the powers and disabilities set out in their documents regarding the Manager.

Having said that, I’m always happy to answer questions.

Invest intelligently. Enjoy the rewards.

Contact Us

Name *

Email *

Phone

How can we help? *

Most Popular Posts

Read more

29 Comments

  1. fred

    In example 1, If Tom does the work, can you explain the gift tax issues. I know Tom can’t be paid for his work..no problem, but how does the gift tax issue arise? Who knows that Tom did the work….does Tom have to file a Gift Tax return…I just don’t understand.

    Reply
    • CheckBook IRA - Jordan

      Sorry, Fred. When I used the word “gift” I didn’t mean it in necessarily in the context of “gift tax” as its defined in the code. To be more accurate with my wording, the IRS would consider the value of Tom’s labor to be an excess contribution. There’s also some question as to whether or not the Service would treat Tom’s doing the labor for the LLC as a prohibited transaction, so its not something I recommend anyone do. As to how anyone would find out, my answer is that its best to understand the rules so that you don’t get into that position in the first place, but it would be on the Manager to report the excess contribution to the Custodian of his IRA, and take the appropriate steps to correct it.

      Reply
  2. Norman Witthauer

    I have two questions:

    If I invest my IRA LLC money in a start up LLC that will operate a service industry (daycare), can I be the manager of that start up LLC primarily controlling the check book and overseeing the financial reporting of the operation and not violate the disqualified persons rule?

    No salary would be paid, but profits would be distributed based on ownership percentage. Would those distributions be subject to the UBIT even if the distribution was flowing directly back into my IRA LLC.

    Reply
    • Jordan Sheppherd

      Hi Norman,

      Investing in a business that you are involved in can be tricky. Issue number one is that if the daycare entity is an LLC, and if it chooses to be taxed as a partnership, the income that the daycare LLC passes back to the IRA LLC would most likely be business income, and would be taxed according to the UBIT rules.

      Issue number two pertains to your involvement in the daycare LLC. Under certain circumstances, it would be permissible for your IRA LLC to own a portion of the daycare LLC, although you would need to be compensated for any work you do or position you hold with the daycare.

      This is the kind of transaction that needs to be carefully reviewed to ensure no prohibited transaction would occur. I’m leaving for the airport right now, and will be at FreedomFest in Vegas tomorrow, so I might be a bit tough to reach, but you can call me at (541) 749-0780 whenever its convenient. I’ll be happy to look everything over and make sure you’re on the right track.

      thanks,
      Jordan

      Reply
  3. Jake

    My question is, if my primary function of the LLC is to setup a brokerage account for investing in the market am I able to receive the same tax benefits as I would if I just had an LLC alone for a brokerage account? Example, using an LLC as your brokerage account you’re eligible to write off “continued education costs”, costs to maintain your LLC, portions of your electric bill based on the square footage of your office in your home, your internet bill, etc.

    Reply
    • Jordan Sheppherd

      Hi Jake,

      You wouldn’t be able to get any tax benefits by setting up a brokerage account for an IRA LLC. There wouldn’t be any write-offs or anything like that, because there’s nothing to write off against. The gains realized in the trading account would not be taxable in the first place. Also, your personal investments, finances, and tax issues have to stay separate from what the IRA is doing. Your IRA is a separate legal entity from you, so there can’t be any crossover at all between you and the IRA in any way whatsoever.

      Let me know if you have any other questions.

      Reply
  4. Jan Hanson

    I have an IRA at Scottrade and would like to change it to a checkbook control for the purpose of giving my daughter a mortgage to buy a home. I would charge her 3.5% interest. If the IRA sets up a mortgage agreement and the monthly payments go into the IRA is this an approved use of funds?
    Thanks

    Reply
    • Jordan Sheppherd

      Hi Jan,

      You can certainly move your Scottrade IRA over and proceed with the Check Book IRA structure, unfortunately you would not be able to mortgage your daughters house. Since your daughter is a prohibited party, any deal or transaction between her and the IRA or the LLC, would result in a prohibited transaction. Its not that your IRA can’t make a loan to someone and receive property as collateral – that is perfectly acceptable. So the investment itself is fine, its just the person you propose doing it with is unfortunately off-limits.

      Let me know if you have any other questions.

      Reply
      • Honer

        In the example above, could I lend the money to my sister, and my sister loan money to my daughter? The loan to my daughter would be a separate transaction between my sister and my daughter.

        The loan between my IRA LLC and my sister would be a separate transaction.

        Neither transaction is contingent on the other.

        Reply
        • Jordan Sheppherd

          You wouldn’t be able to do that because the IRS would look through, or disregard the loan to your sister, and say your original intent was to get the funds to your daughter. They would consider your sister as simply a third party you’re washing the funds through, in order to get them to your daughter.

          We don’t give advice here, but if we did, I would say that I strongly advise against this kind of transaction. This is exactly the kind of workaround thing that the IRS hates.

          Reply
  5. Lewis De Payne

    The following is pertinent to example #1, as set forth above…

    Tom forms a property management LLC, with a simple grantor trust as its sole member (qualified as a disregarded pass-through entity for tax purposes), with Tom as its non-member manager.

    Tom may now perform the repairs on behalf of the property management LLC, because, while Tom is a “prohibited party to the IRA LLC,” the property management company (owned by the grantor trust) is not.

    Reply
    • Jordan Sheppherd

      Hi Lewis,

      I applaud your creative thinking, but in this case I would not suggest doing what you detail in your comment.

      It is true that on the face of it, the property management LLC owned by the grantor trust would not be prohibited from dealing with Tom’s IRA LLC, however because of Tom’s presence as the sole Manager of the property management LLC, the IRS would consider it a prohibited transaction for Tom to perform repairs on any property owned by his IRA LLC.

      When attempting to determine whether or not an entity is a disqualified person to an IRA, the IRS looks at ownership, yes, but they also look to control of an entity, and in a case where an entity is owned by non-prohibited parties, but is controlled by prohibited parties, the control exhibited by the prohibited parties is enough for the Service to consider the entity a disqualified person.

      The Dept. of Labor is pretty good about looking through to the original intent of a transaction, and holding to the spirit of the law. In this case, it would be difficult to see how anyone could believe the grantor trust owned LLC, with Tom as Manager, was formed for any other reason that to try to skirt the issue of Tom working on his own IRA LLC owned property.

      I would point you to DOL Advisory Opinion Letter 2006-01A which addresses some of the issues that are present in this scenario. As I said, its good to be creative, but its also important to stay within the bounds of allowable conduct, because the penalty for straying outside that box is pretty harsh.

      Reply
  6. Jeff Tretter

    Hi Jordan,

    I work as a real estate agent and our company deals with 95% foreclosure properties. My question is can I act as the selling agent and listing agent for properties that my LLC would buy and sell? My commissions would be paid directly to me as a company employee or independent contractor.

    Another question, can a friend of mine, who is an investor, purchase a home, pay me to do repairs, and then sell the house to my LLC?

    Reply
    • Jordan Sheppherd

      Hi Jeff,

      Those are great questions. Unfortunately the answer to both is no.

      In your first question, you correctly point out that your commissions as listing or selling agent would be paid to you by your company, so in that sense there doesn’t seem to be a direct transaction between you and the LLC. However 26 USC 4975(c)(1)(D) identifies as a prohibited transaction a situation where a prohibited party receives benefit from the IRA. In this case, even though the IRA LLC is not paying you the commissions directly, you are indirectly benefitting from the transaction as the listing or selling agent.

      The answer to your second question is not quite as cut and dried. It could be said that there are three separate transactions in your second question. The first being the purchase of the property by your investor friend, which of course does not involve you or your IRA LLC. The second being your friend hiring you to do repairs on the property, which is a transaction between you and him. The third being the sale of the property to your Check Book IRA, which is a transaction between your friend and the IRA LLC (note: I’m using Check Book IRA and IRA LLC interchangeably.)

      The first and second transactions do not involve your IRA LLC, so there is no chance of a prohibited transaction there. The third transaction would occur between your Check Book IRA and a non-prohibited party (your friend), so there’s no issue there either. Here comes a curveball though: the Dept. of Labor, which enjoys full jurisdiction over the question of what constitutes a prohibited transaction in an IRA, has given the impression that they will consider the original intent of a deal in figuring out whether or not a prohibited transaction occurred or will occur.

      Here’s the “if, then” that results from the DOL’s position: if your friend bought the property with the intent of hiring you to do the repairs, and to sell the property to your IRA LLC, then the transaction would likely be considered prohibited. The reasoning would be something to the effect of, since your friend intended to sell the property to your IRA LLC, and have you do the repairs on it, either you are benefitting personally from the fact that your friend has a guaranteed sale of the property to your Check Book IRA, or your Check Book IRA is getting some sort of benefit from the fact that the repairs were done by you.

      I admit this is an argument that doesn’t make a huge amount of sense, but it seems to be the one that the DOL has made. It would be a non-issue if you were not doing the repairs, but since you would be doing the repairs and the intent is there, the DOL would likely consider your involvement in the repairs to be too close to the sale of the property to the IRA LLC.

      For some additional reading, you can read through the DOL’s opinion to see what I’m talking about. This link will take you to Dept. of Labor Advisory Opinion 2006-01A. The Dept. of Labor issues these Advisory Opinion letters to give guidance to taxpayers on issues relating to prohibited transactions. A taxpayer can submit the particulars of a transaction to see how the DOL would treat it. The facts of your case are materially different than this one, as this opinion deals with whether or not the investment of an IRA into a company partly owned by a prohibited party would be prohibited, but when you get to the end they talk about the problem of part of the transaction being anticipatory, and look back to the original intent of the deal.

      To your first question, there’s nothing wrong with someone else in the company you work at being the selling or listing agent, because you wouldn’t receive any benefit from the transaction.

      To your second question, if your remove your involvement in the deal so that you aren’t doing the repairs, then all the complications go out the window. There’s certainly nothing wrong with your friend buying a place, hiring some (non-prohibited) person or company to do the repairs, and then selling the property to your IRA LLC. No problem there, because you’re not involved in the transactions leading up to the sale of the property to your Check Book IRA.

      That’s a long-winded answer to your two questions. Let us know if you have any others, and thanks for commenting.

      Reply
  7. Jeff Tretter

    Thank you for the great detail and I certainly understand. That would lead me to my follow up question. Can I sell my investor friend the home as the selling agent, let him upgrade, and then purchase with my LLC? I would get a commission way upstream and not add any value. I would benefit, but not from using my LLC. This is the scenario that I would most likely use if eligible.

    Reply
    • Jordan Sheppherd

      For this sort of thing, I’d suggest we get on the phone. You don’t want to be benefitting from anything your retirement account does, and it can be a slippery slope with this sort of thing. Give me a call, and we’ll make sure you’re on the right side of things.

      Reply
  8. Randall

    A couple questions. One may be obvious, but it will help with the other questions.
    1) When purchasing a rental with your LLCIRA, is it a 100% cash(from your LLCIRA) deal, or can a only a portion of the LLC IRA be used to purchase the property, the balance is a conventional loan taken out by ?(LLCIRA or you personally).
    2) If your regular LLC owns a rental, can your new LLCIRA purchase it for the balance owed, or a fair market value?
    3) Can me as a manager of the LLC that owns a rental hire a separate property management company to manage the rental?

    Reply
    • Jordan Sheppherd

      Hi Randall,

      1.) The IRA LLC can buy a property with 100% cash, or it can partner up with a non-prohibited party. None of your personal funds can be used, nor can the funds of any other prohibited party. Remember, prohibited parties are disqualified from dealing with the LLC in any fashion. A loan can be taken to buy the property, but the loan would have to be to the LLC, and it would have to be a non-recourse loan. Also, be aware that if you finance property, there will be some taxes on the LLC’s profits from that property.
      2. No, remember that you are a prohibited party; any company you own is considered an extension of you, so it is prohibited as well. Your IRA LLC could not buy any property from you personally, or from any entity that you own.
      3. As the Manager of the LLC, you can certainly hire a property manager to handle the property. The LLC would hire the property manager, but as Manager, you would make that decision.

      Reply
  9. Pamela Morrill

    Is it okay for me to run ads, hire contractors, and lease out rental property owned by my SDIRA. Is there a special way I should sign leases and land contracts?

    Reply
    • Jordan Sheppherd

      Hi Pam,

      There isn’t anything special you’d need to do when signing leases or contracts, other than to sign on behalf of the LLC. As the Manager of the LLC, you can certainly hire contractors and handle the renting out or leasing of the property. You don’t want to be doing any work on the property – hire someone else to do that, but as the Manager of the LLC, you can do the administrative stuff.

      Reply
  10. Mike Kirby

    Jordan,

    Thanks for your help in all of these questions and answers. I want to do the sweat-equity type work whenever possible because it will save me money. What do you recommend setting up instead of a CheckBook IRA LLC for people like me?

    “For you sweat-equity people out there, the CheckBook IRA LLC is not a good vehicle for doing that sort of thing. If you set something like this up, you’ll need to make sure that your role in the management of the property is administrative only – you can’t be out there digging post holes for the new fence around the property.”

    Reply
    • Jordan Sheppherd

      Hey Mike,

      Thanks for the compliment.

      The issue with sweat equity here has to do with the fact that self-dealing rules apply to retirement accounts in general. The only structure I know of that obviates the self-dealing issues, is the ROBS or RollOver Business Startup structure. That’s a totally different animal, and one that people set up for the express purpose of buying a bona-fide business with retirement funds. It allows them to work for the company that’s set up, and be paid a wage.

      We don’t do the ROBS structure, but we work with a CPA and tax attorney that do them. If you’d like an introduction, send me an email and I’ll put you in touch.

      thanks,
      Jordan

      Reply
  11. Mike Kirby

    Thanks a lot Jordan. I’ve read a lot of your material and watched a lot of your Dad’s videos. All have been very helpful to me as I transition to retirement. I’m meeting my
    CPA and lawyer this week. I’ve decided to go ahead and setup an IRA/LLC and just hire any work done that is necessary in the rental houses that I buy. I have two step
    sons, not legally adopted, can I hire them to do the work? They are 25 and 30 and haven’t lived at home for many years but they are both in the construction business. I
    might even want to rent a house to one of them that I buy with my IRA/LLC but I don’t want to cross the line of a prohibitive transaction. Thanks for you response.

    Regards, Mike

    Reply
  12. Peter

    Thank you for all the great, clear and comprehensive information you provide! Much appreciated.

    Regarding excess contribution rules, am I right that I am allowed to be hired by a construction company that would then be contracted to do work for my SDIRA/LLC/Rental Property using myself and perhaps their other employees – since I do not own any shares of the construction company nor do I control it. I would only be their employee paid normally through a W9/1099 process while the LLC would pay the construction company for their services – as it would any other service provider to the rental.

    Reply
    • Jordan Sheppherd

      Hi Peter,

      Interesting question you pose. It would depend on the situation, so I would suggest you call us at (800) 482-2760. We’ll take a look at the particulars and see what’s what.

      Reply
  13. George

    Can you purchase a property and have the owner carry back a note thru the IRA llc?
    Can you rent it if one of the tenants is an llc owned by a family member?

    Reply
    • Jordan Sheppherd

      Hi George,

      Its certainly fine for the owner of the property to carry back a note, but the note would need to be a non-recourse note. You can’t extend your personal credit to back up a loan made to your IRA. Even though this isn’t technically a loan, the note would be “acquisition indebtedness” to geek out on some tax code language, and as a result, the note would need to be non-recourse.

      On the tenant question, it would depend on a couple factors. There are family members who are not disqualified persons, such as siblings, or cousins and aunts and uncles. If they’re not a disqualified person, then you’d need to make sure the rental agreements are at market rates. I’d suggest talking to an attorney first just to make sure everything is kosher with your situation; everyone’s situation is going be different.

      Reply
  14. Bob

    can I hire a friend and pay him to work on my rental properties owned by my personal ira llc even if he is not licenced

    Reply
    • Jordan Sheppherd

      Hi Bob,

      There’s no requirement I’m aware of that says an IRA or IRA LLC has to hire licensed people to work on property. Having said that, there may a State or local requirement to do so, so I’d check that first and go from there.

      Reply

Submit a Comment

Your email address will not be published. Required fields are marked *

Pin It on Pinterest

Found This Post Helpful?

Please share it to your friends!