The topic of “prohibited transactions” is one of the biggest areas of confusion for those considering investing in real estate through their IRAs. As I make presentations and speak with clients and potential clients, many ask, “What if I don’t have quite enough in my self-directed IRA for a deal? Can I use money from my personal savings to make up the difference?” In other words, is combining IRA and personal funds allowed in a real estate deal?

Combining IRA and personal funds

Or does that constitute commingling funds, which is prohibited by the IRS? If the IRS determines your deal involved a prohibited transaction, you not only lose the tax advantages afforded by investing in your IRA, but you might be liable for huge penalties as well.

According to Investopedia, in real estate, commingling is “the illegal act of a broker combining clients’ funds with personal funds because, by law, a broker is required to use a separate trust or escrow fund to temporarily hold a client’s funds.”

That’s different from a single individual combining his or her own funds from different sources, such as a tax-sheltered individual retirement account and taxable personal funds. But there still are “land mines” you could encounter if you’re not careful. So it’s always advisable to seek guidance from a professional financial, tax or legal adviser who is experienced in such matters.

Court case provides some clarity

Phoenix attorney Mat Sorensen has focused his law practice on self-directed IRA law since 2006 and is author of “The Self Directed IRA Handbook.” In a posting on his blog, Sorensen cites a Bankruptcy Court case that he says provides some clarity for IRA owners.

One significant ruling in the case, known as In re Cherwenka, Case 13-57592-MGD (Bankr. N. D. GA 2014), was that there was no prohibited transaction when the IRA owner and the IRA co-invested into a property together. The property in question was owned 45% by the IRA and 55% by the IRA owner. The court reasoned that “the interests appeared to have been treated distinctly and that the HUD documents from the sale of the property show that the IRA and the IRA owner’s proceeds from the sale were treated separately and that they were apportioned properly,” Sorensen wrote. “As a result, the Court concluded that no prohibited transaction occurred since there was no evidence of unfair benefit between the IRA owner and his IRA.”

It’s best to seek expert guidance

Such determinations aren’t easy for the average investor to make so you should always have an experienced and trusted legal adviser as part of your investment “team.” Because the rules regarding self-directed IRAs are extremely complex, it pays to have an expert to keep you from running afoul and losing the tax benefits they can provide.