To commingle in real estate means to pool money from multiple investors along with personal funds or other people’s money. Commingling can happen in many different ways. Sometimes it’s legal; sometimes it’s not. Let’s take a closer look at this important concept to make sure you’re always following the law.
What are some examples of commingling in real estate?
The minute someone mentions something being illegal, your ears may perk up and you might start worrying you’ve done something wrong. Suddenly you can’t even think of examples of times someone might mix money from different sources together, and you grow concerned you’ve somehow commingled when you shouldn’t have.
Don’t worry! Commingling happens a lot in real estate and there’s plenty of times when it’s perfectly okay.
Commingling is not legal when it entails a breach of a fiduciary’s contract. For example, if you’re investing in real estate using a managed self-directed IRA (SDIRA), your SDIRA’s manager cannot use both the funds from within your IRA and their own funds to purchase real estate. It doesn’t even matter why the manager would want to commingle; it’s simply against the law.
How do I avoid illegal commingling when investing in real estate?
In the event that you decide to invest in a real estate property with others, there’s a high probability that your investment will be considered a security, which means you’ll have to fulfill certain regulations managed by the Securities and Exchange Commission (SEC). Knowing how to select the right legal entity for your real estate investment can help keep your security legal. You can use a limited liability corporation (LLC) to purchase properties, for example, or fund real estate into a trust.
Whatever route you take, your priority should be keeping your pooled money separate from your personal money and money used for other investments. To play it safe, don’t make personal payments using your business account. And always document any transactions between your personal account and business account.
Some investors create separate bank accounts for each of their properties. Some have even been known to place their funds into dedicated escrow accounts or trust accounts managed by a third-party just to avoid the possibility of comingling. Proper bookkeeping should be enough, though, to prevent an audit and keep everything legal.
Commingling when you’re managing both personal and investment funds isn’t like excluding rental income from your tax return. There’s no ratio of personal funds and investment funds that you can achieve that will make it legal or somehow benefit you when it comes to tax time. It’s simply not done because of the regulations that govern real estate investment. There are many ways to finance properties without commingling.