Self-Directed IRA Restrictions
There are self-directed IRA restrictions to owning real estate in an IRA account. And, if these are not followed, various penalties and taxes may occur. Briefly, the main restrictions are as follows:
- IRA real estate cannot be used as a personal residence.
- IRA real estate cannot be used for personal use.
Self-dealing occurs when an IRA owner uses their individual retirement funds for their personal benefit rather than to benefit the IRA. As an IRA owner, if you violate these rules, your entire IRA could loose its tax-deferred or tax-free status. It is very important that you work with competent professionals to help avoid violating these rules.
IRC 4975(c) (1), identifies prohibited transactions to include any direct or indirect:
- Selling, exchanging, or leasing, any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you.
- Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.
- Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.
- Transferring or using by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intends to use.
- Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.
- Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.
If you participate in a transaction which does not fit SPECIFICALLY within these guidelines, the Department of Labor or the IRS will analyze the specific facts and circumstances in order to decide whether you have engaged in a prohibited transaction. For more information, please click on Self-Directed IRA Restrictions.