So you have a self-directed IRA and you’ve invested in real estate, or you’re thinking about buying real estate with your IRA. You know your IRA needs to pay its share of the expenses. You’re plagued by one nagging question, “What do I do if my IRA runs out of money?”
It’s true that if your IRA owns 100 percent of a piece of property then the IRA pays 100 percent of the costs (closing costs, property taxes, repairs, etc). If the IRA owns 50 percent it pays 50 percent and so on. Now you’ve come to the point where you get a property tax bill in the mail for your IRA-owned rental house and there’s not enough in the account to pay for it. What’s next? What do you do? Fortunately the answer may not be as difficult as you thought.
The first thing you could do is to make an annual contribution. If you have a Traditional or a Roth IRA that contribution is limited to $5,000 or $6,000 if you are over 50. That could help. But what if you don’t have the $5k or really don’t want to use your cash for this purpose?
Fortunately there are still more solutions. Your self-directed IRA can own more than one asset. Say, for example, your IRA owns this rental house and owns some gold bullion. You could sell the gold and use the proceeds to pay for your property tax bill. No other assets in the IRA? No problem.
The next solution comes from the other IRA accounts you may have. Investment advisors always tell us to diversify so it’s likely you have a self-directed IRA and a typical IRA. You could transfer cash from your typical IRA over to the self-directed IRA and cover the shortfall.
Haven’t found your solution yet? Short on cash, no other assets, no other IRA? Well then what do you do? There’s still hope. Your IRA could bring on a partner. As long as the partner is not a “disallowed person” (ascendants & descendants basically) they can become a partner and bring in the needed cash.
It’s possible for your IRA to borrow money too, as long as it’s a non-recourse loan. In a case like this the non-recourse loan would more likely come from an individual than an institution. As long as the lender is not “disallowed” they can make this type of loan to your IRA but watch out for UDFI (unrelated debt financed income tax). Ask your CPA about that or go to www.irs.gov and look up Publication 598. If none of the solutions above work for you, you can always just sell the asset and be done with it. When you invest in real estate there are lots of expenses. It’s possible that from time to time your IRA may run short of available cash to cover them.
To re-cap here’s a list of the solutions:
• Make your annual contribution
• Liquidate other assets in the IRA
• Transfer money from other retirement accounts
• Bring on a partner
• Take on a non-recourse loan
• Sell the asset
To learn more go to www.uDirectIRA.com
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