Opening and operating a self-directed IRA can be intimidating, especially when you’re not all that familiar with the rules. The good news is that all the same rules for operating a self-directed IRA still apply to self-directed real estate IRA rules, but there are a couple extra rules that are imperative to follow.
Because you have more control over the investments you make with your IRA assets, it’s especially important that you’re fully in compliance with IRS laws. To understand the ramifications of not following these rules, we’re taking a look at the self-directed IRA real estate rules that are most commonly misunderstood.
Who is a disqualified person?
Who specifically are we referring to as disqualified persons? That would be you as the IRA owner, your spouse, your children (and their spouses) and your parents, including any in-laws. They are what the IRS refers to as disqualified persons. These same people cannot conduct any business with you or with your IRA, and they cannot directly benefit from the property. Say there’s a repair needed, like plumbing, and your father-in-law has a plumbing company, he, unfortunately, cannot do the work needed, because he’s disqualified.
What is self-dealing?
Self-dealing occurs when you, the account holder, does business with any disqualified person. This includes any transactions made that directly benefit the account holder. For instance, if you’re in search of a property to invest in, and your parents just put their house up for sale, you cannot buy that property.
This is important to remember because if you’ve violated a rule, you run the risk of up to 10 percent tax penalties and the possibility of your IRA being voided for non-compliance with IRS laws.
Repairing the property
Because the IRA is technically the owner of the real estate property, and you aren’t, you’re not allowed to make repairs or improvements yourself. Nor can you pay-out-of-pocket for repairs or home improvements yourself, the IRA is responsible for paying any and all costs.
If found violating this rule, the IRS could force you to withdraw the real estate from the IRA. So, always play it safe, and hire a professional to handle repairs on your real estate investment.
What are indirect benefits?
Indirect benefits are where a lot of investors feel things get a bit murky, so let’s clearly define it.
You cannot purchase property with your self-directed IRA with the intention of using it as a vacation property. Nor can any disqualified person stay on the premises for even one night.