If you own an IRA account, you've probably read or heard a lot about prohibited transactions. If you haven't, that's okay.
Let's just say you don't want to get caught being involved in one.
This is vital information for anyone who invests with a Self-Directed IRA, so read on.
Direct Prohibited Transactions
The types of transactions that could fall under the prohibited transaction rules can be grouped in three different categories: Direct, Conflict of Interest, and Self-Dealing.
- You sell real estate owned by your Self-Directed IRA to your father.
- You lease an interest in a piece of property owned by your Self Directed IRA to your son.
- You sell real estate you own personally to your Self-Directed IRA.
- You transfer property you own personally to your Self-Directed IRA.
- You purchase real estate with your IRA funds and lease it to your mother.
- You use your Self-Directed IRA funds to purchase an interest in an entity owned by your wife.
- You transfer property you own personally that is subject to a mortgage to your Self-Directed IRA.
- You use personal funds to pay expenses related to your Self Directed IRA real estate investment.
- You use personal funds to pay taxes and expenses related to your Self-Directed IRA real estate investment.
The direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified person” can take on many forms. Here are some more examples.
- Dan purchases real estate with his Self-Directed IRA funds and personally makes repairs on the property
- Larry purchases a condo with his Self-Directed IRA funds and paints the walls without receiving a fee
- Kris buys a piece of property with his Self-Directed IRA funds and hires his son to work on the property
- Karen buys a home with her Self-Directed IRA funds and her son makes repairs for free
- Lisa owns an office building with her Self-Directed IRA and hires her son to manage the property for a fee
- Shari owns an apartment building with her Self-Directed IRA funds and has her father manage the property for free
- Joe receives compensation from his Self-Directed IRA for investment advice
- Troy acts as the real estate agent for his Self-Directed IRA
The direct or indirect lending of money or other extension of credit between an IRA and a “disqualified person”.
- Trump lends his daughter $4,000 from his IRA
- Trump uses the assets of his Self-Directed IRA as security for a loan
- Trump and Mrs. Trump personally guarantee a business loan owned by their self-directed IRA
- Trump personally guarantees a bank loan to his Self-Directed IRA
- Trump uses his personal assets as security for an Self-Directed IRA investment
- Trump uses Self-Directed IRA funds to lend an entity owned and controlled by his father $25,000
The direct or indirect transfer to a “disqualified person” of income or assets of an IRA also constitutes a prohibited transaction. In real life, this might look like any of these examples:
- Steve uses a house owned by his Self-Directed IRA for personal uses
- Tim deposits Self-Directed IRA funds in to his personal bank account
- Pat is in a financial jam and takes $12,000 from his Self-Directed IRA to pay a personal debt
- Mark buys precious metals using his Self-Directed IRA funds and uses them for personal gain
- Jack purchases a vacation home with his Self-Directed Self Directed IRA funds and stays in the home on occasion
- Amy buys a cottage on the lake using her Self Directed IRA and rents it out to her daughter and son-in-law
- Stallone purchases a condo on the beach with her Self Directed IRA funds and lets her son use it for free
- Pitt uses his Self-Directed IRA to purchase a rental property and hires his friend to manage the property. The friend then enters into a contract with Richard and transfers those funds back to Richard
- Houston invests her Self-Directed IRA funds in an investment fund and then receives a salary for managing the fund.
- Bloomberg uses his Self-Directed IRA funds to purchase real estate and earns a commission as the real estate agent on the sale
- Edison uses his Self-Directed IRA funds to lend money to a company he owns and controls
- John invests his Self-Directed IRA funds into a business he owns 75% of and manages
Conflict of Interest Prohibited Transactions
A “Conflict of Interest Prohibited Transaction” often involves one of the following:
- Trey invests his Self-Directed IRA funds into a corporation in which he manages and controls but owns a small interest in
- Lee uses her Self-Directed IRA funds to loan money to a company she owns a small interest in but manages and controls the daily operations of the company
- Sally uses her Self-Directed IRA to lend money to a business that she works for in order to secure a promotion
- Harry uses his Self-Directed IRA funds to invest in a real estate fund that he manages and where his management fee is based on the total value of the fund’s assets.
Self-Dealing Prohibited Transactions
Self-dealing refers to the direct or indirect act by a “Disqualified Person” who is a fiduciary whereby he/she deals with income or assets of the IRA in his/her own interest or for his/her own account.
- Sara makes an investment using her Self-Directed IRA funds into a company she controls which will benefit her personally
- Jason uses his Self-Directed IRA funds to invest in a partnership with himself personally in which he and his family will own greater than 50% of the partnership
- Helen uses her Self-Directed IRA funds to invest in a business she and her husband own and operates and her and her husband earns compensation from the business
- Steve uses his Self-Directed IRA funds to lend money to a business in which he controls and manages
- Victor invests his Self-Directed IRA funds in a trust in which Victor and his wife would gain a personal benefit
- Brenda uses her Self-Directed IRA funds to invest in a real estate fund managed by her Son. Brenda’s son receives a bonus for securing her investment.
- Frank invests his Self-Directed IRA funds into a real estate project that his development company will be involved in order to secure the contract
- Ryan uses his Self-Directed IRA funds to invest in his son’s business that is in financial trouble
- David uses his Self-Directed IRA funds to buy a note on a piece of property for which he is the debtor personally
Hopefully this article helps you, feel free to bookmark it as it sure to prove useful to you in the future if you plan on investing using a Self-Directed IRA.
If you have any questions about investing with a Self-Directed IRA, please contact Royal Legal Solutions today.