- Real Estate Investments inside of an IRA have specific rules you must follow
- No deals with Disqualified Persons
- Watch out for self-dealing
- Sweat Equity can be tempting but don’t
- UBIT and UDFI should be considered
When it comes to investing your retirement account money into real estate, there are a few rules you need to be aware of. These rules are in place to ensure that you don’t disqualify your IRA when making these investments. Let’s discuss ira prohibited transactions real estate investments need to be aware of so that you can stay within the limits of what is allowed. Knowing these rules will help you make intelligent and profitable investments with your IRA!
The first rule to be aware of is the disqualified persons rule. This rule prohibits you from doing business with certain people who are considered disqualified persons. Disqualified persons include your spouse, parents, children, and grandchildren and include your IRA custodian, any family members of yours that are disqualified persons, and any companies that you or a disqualified person own. Doing business with these people would also disqualify your IRA.
Learn more about disqualified persons
The second rule to be aware of is the prohibition on self-dealing. This means that you cannot use your IRA money to buy property for yourself or any disqualified persons. This would disqualify your IRA, and you would no longer be able to take advantage of the tax benefits that come with it.
The third rule that can be very hard for those that like to take a hands-on approach to their investment is sweat equity. This rule prohibits you from doing any work on the property that your IRA owns. If your rental property needs something fixed or it needs some upkeep to improve the property you aren’t able to do any of this yourself. You must hire someone to perform all improvements or fixes to your rental.
UBIT and UDFI
Unrelated Business Income Tax (UBIT) is imposed on income that your IRA earns from a business inside your IRA.
Unrelated Debt-Financed Income (UDFI) is when you use leverage to buy property inside your IRA. You can use leverage by taking out a loan. You will then have to pay taxes on your IRA’s income from this activity.
Learn more about UBIT and UDFI
Investing in real estate with your IRA can be a great way to grow your retirement savings. Make sure you do it within the rules! Knowing these rules will help you stay within the limits of what is allowed and avoid any penalties.
If you have any questions about these rules or want to learn more about IRA investing in real estate, don’t hesitate to contact us.
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