We all make mistakes. Unfortunately, a mistake with your self-directed IRA can be very costly. Get educated so you can play it clean. There is much more to learn, but this is a good place to start:
Here is a list of our Top 5 Real Estate IRA Questions:
1. Can I live in my IRA-owned rental property and pay rent?
One of the most common questions we are asked is: “Can I buy my house and then can I live in it?” The answer is of course “No”. You are a disqualified person and cannot use an IRA-owned asset while it is held in your IRA.
2. I know! I’ll buy Jim’s house, and then he’ll buy mine. I am a genius!
Although this sounds like a great plan, this is not allowed. You would indirectly violate the prohibited transaction rules and could be accused of tax evasion and money laundering. The same scenario also exists where you make a loan to Jim with your IRA and Jim’s IRA makes a loan to you. This is no different than taking a distribution from your IRA, except you would also be committing a prohibited transaction, and prohibited transaction penalties are not nice. Oh yeah, don’t forget about the tax evasion and money laundering thing, too! Yikes!
3. Can I do the maintenance myself on property purchased in my IRA?
No, you cannot. When you do the work yourself, you use your labor to increase the value of your IRA-owned assets, which can lead to overcontributing to your IRA. When work needs to be done on a rental property, it is best to pay a non-disqualified party to do the work. You will want to be sure you compensate the party doing the work with IRA funds by submitting a Payment Authorization Letter to IRA Express.
4. My daughter is going to college. I want to buy a rental house near the university for her and her friends to live in. The friends will pay rent, and I’ll pretend she doesn’t live there. Can I do this? Nobody will ever know!
This guy is looking for trouble. Once again, this scheme would be a prohibited transaction. Did you know that a prohibited transaction causes your IRA to lose its tax-exempt status and the entire account is treated as a taxable distribution? This means that all assets are distributed from the account and become taxable. Additionally, the IRA holder would also be subject to a 15% penalty as well as a 10% early withdrawal penalty if they are under 59 1/2 years old. It’s not worth it, so don’t try it!
5. Who pays the expenses for the IRA-owned property, and where is the rent deposited?
This one is easy to answer. You do not own the property. Your IRA legally owns the property, so income and expenses must go in and out of the IRA. A property manager is the best option for an IRA-owned property. The more “hands-off” you are in regard to taking care of the property, the better off you will be. The property manager pays the expenses and sends the net rents to your account with IRA Express. If there is an expense the property manager does not pay, such as property taxes, you can direct IRA Express to make this payment directly from the cash portion of your IRA account.
You may also enjoy this more recent article: How to Buy Real Estate With Your Self-Directed IRA.