subject: Be Aware of Prohibited Transactions before Purchasing Real Estate in an IRA [print this page] Be Aware of Prohibited Transactions before Purchasing Real Estate in an IRA
When it comes to purchasing real estate in an IRA, most people want to know what kinds of purchases are permissible. The truth is that it is more about what not to do involving different types of transactions and parties.
The IRS and ERISA (Social Security Administration's retirement plan guidelines that were developed in 1974) both lay out crystal clear rules concerning "prohibited transactions," "self-dealing," and "disqualified persons." Actually, the most common mistake concerning prohibited transactions occurs when the self directed IRA partakes in commerce with a disqualified person.
In order to understand these prohibited transactions, we must first understand who is a member of the "disqualified party." A disqualified party in a self directed IRA is:
The owner of the IRA or his/her spouse
Any direct descendants or ascendants such as children, grandchildren, great grandchildren, parents, grandparents, and great grandparents. (It's noteworthy to mention that siblings, uncles, aunts, nieces, and nephews are not included in this list.)
An officer, director, 10% owner, or employee of the entity that has ownership of the property
A corporation, estate, or partnership that owns over 50% combined by any disqualified persons
Any fiduciaries or people that provide service to the IRA
An Overview of Prohibited Transactions
The IRS has strict codes regarding prohibited transactions. Ultimately, any rules or regulations regarding an Individual Retirement Account are there so that the funds are easy to track.
The government encourages us to have enough money upon retirement. With the influx of Baby Boomers nearing retirement age, a retirement plan was enacted in 1974, so there would be adequate funds upon retirement. Uncle Sam wants us to have adequate funds, but they also want to collect taxes on everything. That's why every plan is required to be administered by a trustee or custodian.
Therefore, the retirement account is designed to benefit you upon retirement and not before then. Most prohibited transactions have to do with the holder of the account or other disqualified persons benefiting from the retirement plan before its maturity. Such actions could be interpreted as actions to evade taxes on realized gains.
The following are examples of prohibited transactions (but not limited to the following examples):
No direct or indirect selling, leasing, or exchanging property between you and any other disqualified member
No buying a home for the IRA and any disqualified parties living in it
No selling personal property to the retirement plan
No paying yourself for managing property or the account
All expenses, maintenance, remodeling, and profits may only go through the self directed IRA account
Is a Real Estate IRA for You?
The truth is that you are the only person that will know if purchasing real estate in an IRA is for you. You must pick investments that you feel comfortable making with a self directed IRA. But don't be disheartened by any of these rules and regulations because an experienced self directed real estate IRA provider will help ensure that your retirement plan is appropriately structured.
