Many investors use self-directed retirement accounts to invest in real estate, leveraging the tax advantages of IRAs or Solo 401(k)s to build wealth through rental properties, commercial buildings, or other real estate holdings. Because IRS rules prohibit account holders from providing personal services to their IRA-owned properties, they often hire professional property managers to handle leasing, maintenance, and tenant relations. This arrangement helps maintain an arm’s-length relationship, ensuring compliance with regulations while allowing the investment to generate passive income within the retirement account.
Could Your Property Manager be a Disqualified Person?
Under Internal Revenue Code 4975, a service provider to the IRA may be considered a disqualified person if they have a fiduciary relationship with the IRA. A disqualified person includes the IRA owner, certain family members, and any entity in which the IRA owner has a significant ownership interest. Additionally, anyone providing services to the IRA who has discretionary control over its assets or decision-making authority may also be considered disqualified.
If your IRA owns rental property and hires a property manager, and that manager does not have discretionary authority over the IRA’s assets, they likely are not disqualified solely due to their service provider role. However, if your IRA lends money to the property manager, that could raise a prohibited transaction issue under IRC 4975(c)(1)(B), which prohibits for example, lending money or extending credit to a disqualified person.
Key Factor
The key factor is whether the property manager qualifies as a disqualified person based on their role. If they do, the loan would be a prohibited transaction. If they are not disqualified, the loan could be permissible.
How To Proceed
To start, reach out to us at uDirect IRA Services. Also, you may wish to consider consulting a legal or tax professional to determine whether the property manager qualifies as a disqualified person based on the specifics of their role. If the property manager is not disqualified, it would be wise to document their status clearly before moving forward.
uDirect IRA Services, LLC is here to help you build your retirement savings. We are not a fiduciary and we do not offer tax or legal advice. We do not recommend specific investments, rather we guide you through the process to self-direct your retirement savings into assets you choose. To get started, we offer a free consultation. Schedule yours HERE – To open an account, click HERE.
