IRA Real Estate

Prohibited Transactions

Some types of self-directed transactions violate the basic intent of your individual retirement account, and may subject your account to risks and penalties.

Your retirement plan is intended to benefit you when you retire and not before. Transactions that can be interpreted as providing immediate financial gain to the account holder, or other disqualified persons, are not allowed.

For example, an IRA holder may not:

  • Borrow money from the individual retirement account.
  • Sell, exchange or lease property to their IRA.
  • Receive unreasonable compensation for managing property held by the IRA.
  • Use the IRA as security for a loan.
  • Transfer plan income or assets to disqualified persons.
  • Lend IRA money to disqualified persons.
  • Extend credit on their IRA to disqualified persons.
  • Furnish goods, services, or facilities to disqualified persons.
  • Allow fiduciaries to obtain or use the plan’s income or assets for their own interest.

For IRAs or 401(k)s, a disqualified person is:

  • The IRA holder and his or her spouse.
  • The IRA holder’s lineal descendants, ascendants and their spouses.
  • Investment advisers and managers.
  • Any corporation, partnership, trust, or estate in which the IRA holder has a 50 percent or greater interest.
  • Anyone providing services to the IRA, such as the trustee or custodian. (See IRS Section 4975 for a complete list of prohibited parties’ credentials).

Please refer to IRS publication 590 for more information.

Transactions That Are Not Legal

When using your IRA to invest in real estate, there are a few restrictions regarding how the property can be used (prohibited transactions) as well as who you can buy from and sell to (disqualified persons).

It is simply not worth engaging in prohibited transactions and jeopardizing your IRA, especially when there are so many great ways to use your IRA to grow your retirement funds.

 

What is a disqualified person?

You cannot conduct transactions with certain individuals who are considered disqualified persons, as outlined in Section 4975 of the IRS code. The following are disqualified persons:

  • Fiduciaries of the plan—this includes yourself and any advisors, such as the plan custodian or administrator
  • Your spouse
  • Your lineal ascendants and descendants and their spouses (your grandparents, parents, and children)
  • A person providing services to the plan
  • Corporations, partnerships, trusts, or estates in which you own at least 50% of the voting stock, directly or indirectly

Here are some examples of prohibited transactions:

  • Using the property for your vacation
  • Letting your child live in the property, paying rent or rent-free
  • Hiring your son-in-law to rehab the property?
  • Selling property that you own to your IRA?
  • Using your own money for expenses or loan payments

 

Using the property during your vacation

You cannot use any property owned by your IRA, even for a few days. This includes timeshares, vacation condos, and undeveloped land that may have be used for hunting or fishing. But don’t despair. When it’s time to take distributions, you can distribute the property to yourself and have full use of it.

Letting your child live in the property, paying rent or rent-free

Children are considered disqualified persons, and a disqualified person cannot receive any benefit from your IRA investment. Your children, parents, or grandparents cannot lease the property owned by your IRA or even live in it without paying rent. This includes renting an office in a commercial building that your IRA owns.
Paying your son-in-law to rehab the property

You cannot hire or use disqualified persons to repair or maintain property that is owned by your IRA. The spouse of your descendants or ascendants is considered a disqualified person. In fact, you also cannot perform repairs on your IRA’s property. It is best to hire an individual or company not related to you.
Selling property that you own to your IRA

Because you cannot receive any personal benefit from your IRA investment, you cannot sell or transfer property that you own—or that your descendants and ascendants own—to your IRA. It is also prohibited to use an intermediary to avoid selling the property directly to your IRA. “Selling” or transferring property to another party so that they can sell it to your IRA violates the “indirect rule,” which states that a transaction that can be done directly should not be done indirectly.

Using your own money for expenses or loan payments

All expenses and loan payments must be paid by the IRA. If you use your own money, it is considered an excess contribution to your IRA, and is subject to penalty. It can also be considered a prohibited transaction. If your IRA is short of funds, you can transfer or roll over funds from another retirement plan, borrow money, sell an asset owned by your IRA, or bring in partners.