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:
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:
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.
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.
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.
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.
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.