Your self-directed individual retirement account is a powerful vehicle for investing in real estate. But make sure you understand the rules so you don’t run afoul of state or federal regulators. There are pitfalls you need to be able to recognize and avoid.
Two areas you definitely need to be aware of are rules regarding “disqualified persons” and those involving “prohibited transactions.”
Here’s a quick look at these to acquaint you with the concept. It’s always best to consult with your individual tax, financial or legal advisers, who can offer more detailed insight about how these apply to your specific situation.
2 Potential Pitfalls in Self-Directed Investing
What Is Meant By ‘Disqualified Person’?
Investments through an IRA must be at “arm’s length” and not involve self-dealing.
“Disqualified persons” are those individuals or entities whom the IRS deems to be too close for a legitimate transaction with an IRA. No disqualified person may enter into or benefit from a transaction with an IRA, either directly or indirectly.
The IRS’ list of disqualified persons includes:
- The IRA owner (who is a fiduciary for the IRA.
- The IRA owner’s spouse, parents and other lineal ascendants.
- The IRA owner’s children and other lineal descendants and their spouses.
- Any corporation, partnership, trust or estate in which any of those persons singly or in combination owns 50 percent or more.
- Any officers, directors, managers, trustees, key employees or partners of a disqualified entity.
What Are Prohibited Transactions?
By law, an investor (and close linear relatives) are prohibited from giving or receiving any benefit from the retirement investments. Such prohibited transactions include:
- Doing direct maintenance on a property (such as painting, landscaping, rehab).
- Personally paying a property’s bills.
- Letting any of your children act as paid workers for the property.
- Using the property as a vacation home.
- Renting the property out to your children.
- Using the property as collateral in an unrelated dealing.
Because the IRS has very specific rules prohibiting “self-dealing” (under Internal Revenue Code Section 4975) and tax regulations are prone to varying interpretations, you should seek the counsel of your own CPA or attorney who can evaluate your unique goals and circumstances and advise you on the most appropriate course of action for you. Remember: Due diligence is always up to you.
Got More Questions? Download our Free e-Book
Do you have other questions about wealth-building with your self-directed IRA? Download our free e-book, “Understanding the Basics of Self-Directed IRAs.”
Once you determine that rolling over your retirement account is in your best interests, we can help. Investment Resource of AZ, LLC is your Arizona rollover specialist. Our team has successfully rolled over millions of dollars in IRA funds for clients, educating them, streamlining the process and supervising each step of the way for them.
Call us at 602-885-6122 or email firstname.lastname@example.org.