Questions about Real Estate in a self-directed IRA and about paying or receiving management fees?

Question:

I have done a pretty good amount of learning about self-directed IRA’s and investing locally in real estate and have talked extensively with Equity Trust and Pensco.  Just learned about your company through a Sacramento real estate investing club and perused a powerpoint you put together.

I had 2 questions for you:

1) I have heard mixed things about whether or not you can pay yourself a management fee from property you purchased with your own self-directed ira funds.  Do you have some clarification as to the perception of the IRS on this issue?  I’ve heard that you can get a letter from a local respected industry professional to verify the amount but I’ve also read this could be perceived as commingling.  (I am aware of the strict rules of keeping all funds separate in all other regards).

2) How does your company compare to Equity Trust with regard to monthly and other fees?

Answer:

Thank you for your inquiry.  The answer to your first question is no, you absolutely may not take any kind of management fees for property owned by your IRA.  When people tell you that, they are misunderstanding Internal Revenue Code Section 4975(d)(2), which is often referred to as the “reasonable compensation exception.”  They may also be looking at IRS Publication 590, which in attempting to explain in plain English the rules makes the statement that taking unreasonable compensation for managing an IRA is a prohibited transaction.  This statement is simply a summary of 4975(d)(2), which many people misinterpret.  What people conveniently tend to ignore is that you have to read the whole statute to understand the rules, and 4975(d) starts out with the phrase “except as provided in subsection (f)(6)…”  Unfortunately, 4975(f)(6) voids the reasonable compensation exception for IRA beneficiaries, which means you are not able to take advantage of the reasonable compensation exception for your own IRA property.  Some people still want to cling to this idea anyway, but the Treasury Regulations for Section 4975 explicitly state “However, section 4975(d)(2) does not contain an exemption for acts described in section 4975(c)(1)(E) (relating to fiduciaries dealing with the income or assets of plans in their own interest or for their own account) or acts described in section 4975(c)(1)(F) (relating to fiduciaries receiving consideration for their own personal account from any party dealing with a plan in connection with a transaction involving the income or assets of the plan).  Such acts are separate transactions not described in section 4975(d)(2).”  Sections 4975(c)(1)(E)-(F) make it a prohibited transaction for a fiduciary to directly or indirectly benefit from the income or assets of the IRA, and you are a fiduciary of your self-directed IRA.  The final result of this legal somersaulting is that the IRA owner cannot be compensated.  Anyone advising you otherwise does not fully comprehend the rules.

The details of the above analysis and many other things you need to know about self-directed IRAs may be found in the book that I co-wrote with Dyches Boddiford and George Yeiter entitled “Real Estate Investment Using Self-Directed IRAs and Other Retirement Plans.”  You may want to obtain a copy of the book for your future reference. Contact Ryan Kimura (Ryan@QuestIRA.com) for a copy. It retails for $19.99 including shipping and handling.

With regards to your second question, I refer you to our fee schedule, which is included in the EZ IRA Starter kit attached.  In some instances we would be cheaper than Equity Trust Co. and in others we would be more expensive.  However, we feel that our knowledge base and more personal service cannot be beat at any price.

Quest IRA, Inc. Application with Fee Schedule

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