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The decision to purchase real estate with your retirement funds is a great way to take advantage of the benefits of a self-directed IRA. However, property investments are also governed by rules that investors must familiarize themselves with and follow.

In order to avoid penalties and excess tax payments on the real estate investment properties in your self-directed IRA, you must adhere to certain regulations regarding prohibited transactions and disqualified persons. A prohibited transaction is defined as any improper use of your IRA by you or any disqualified person.

Disqualified Persons

Many prohibited transactions stem from the involvement of a disqualified person.  The following people are considered disqualified persons for the purposes of your self-directed IRA:

  • You, the account owner
  • A beneficiary of the IRA
  • Your spouse
  • Your lineal ascendants/descendants and their spouses
  • Plan fiduciaries (including advisors, custodians, and administrators)
  • An entity (corporation, estate, partnership, etc.) in which you own at least 50% of the voting stock, directly or indirectly.
  • An officer, director or a 10% or more share holder or partner of 
  • Anyone providing services to the IRA, such as the trustee or custodian (See IRS Section 4975 for a complete list of prohibited parties credentials)

Examples of prohibited transactions in a real estate IRA may include:

  • Buying the property of a disqualified person in your IRA
  • Borrowing money from your IRA to pay off a personal mortgage
  • Taking personal payment directly from an income producing property
  • Hiring a disqualified person to provide services for a property held in your IRA (i.e., using your spouse as the property manager)
  • Using real estate owned by your IRA as collateral for a personal loan
  • Any use of a property owned by your IRA that brings personal benefit to you, rather than the account
  • Using property owned by your IRA as your vacation home
  • Allowing a disqualified person to live in IRA-owned property

 

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