Real Estate Investing and IRA Prohibited Transactions

Using your self-directed IRA to hold your real estate investments can be an excellent way of both sheltering the investment from taxes and funding your retirement. The IRS gives some tremendous tax advantages IRAs; however, because of the advantages given they do ask you to follow their rules. The most common danger is inadvertently executing a prohibited transaction.  By learning what to avoid, you can safely and efficiently use real estate to grow your retirement account.

Disqualified Persons

A disqualified person is simply a person or entity the IRS doesn’t allow your self-directed IRA to have transactions with. The most common examples of a disqualified person are you, the IRA holder, your spouse, your parents, your grandparents, your children, your grandchildren or spouses of your children or grandchildren.  A disqualified person can also be a company or partnership that is owned or controlled by a disqualified person.  If you or another disqualified person will directly or indirectly benefit from the investment property you wish to hold in your self-directed IRA, you may want to reconsider the investment as a prohibited transaction is more likely to occur.

Examples of Real Estate Prohibited Transactions

  • Holding a second home or vacation property within your self-directed IRA that is personally used by a disqualified person for any length of time.
  • Purchasing a rental property for a disqualified person to live in even if they pay rent to the IRA.
  • Using real estate in your IRA to secure a personal loan for you or another disqualified person.
  • Lending money from the IRA to a disqualified person for a down payment on a home or other home expense.
  • Buying or selling a property between the IRA and a disqualified person.
  • A disqualified person performing maintenance, repairs or providing other ‘sweat equity’ on property owned by the IRA.
  • Paying an expense incurred by the IRA owned property out of personal funds.  Applies to all disqualified persons.
  • Personally collecting rents on behalf of the IRA and then ‘reimbursing’ the IRA.  All income needs to go directly to the IRA.

Conclusion

A self-directed IRA is a powerful tool for real estate investors. If the rules are followed you will benefit from the traditional tax advantages IRAs offer.  Understanding the rules regarding prohibited transactions and disqualified persons will allow you to avoid making a costly mistake and be able to grow your investments in a tax efficient manner.  If you have questions about a specific scenario, please give us a call at 877-742-1270 or send us an e-mail at info@ndtco.com.

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