Top 5 Transactions to Avoid When Investing with a Real Estate IRA

Real estate IRAs are the favored retirement plan structure for those who want to control their own investing funds and decisions using self-directed plans. Alternative assets in this realm can offer steady monthly income for those who use rentals this way. Other investors prefer the potential for a quick influx of capital on rehab-and-flip properties.

The investing opportunities are virtually endless and the self-direction process is fairly simple. The idea behind self-directing a retirement plan is to find what you know best and invest. The choices are yours to make, and you are free to choose your own assets to secure a successful financial future for yourself.

Real estate investments include:

  • single and multi-family homes
  • foreign property
  • commercial space
  • tax liens and deeds
  • timberland
  • farm land
  • … and more

Regardless of what type of real estate asset you choose, there are rules that govern retirement plans. Ignorance is NOT bliss if you fail to understand and comply with these regulations. Operating outside compliance with IRS standards can cause your account to suffer penalties and/or taxation, and the account can also lose its intended tax-sheltered status.

Below are the top five real estate transactions you should avoid in order to remain in the good graces of the IRS.

1. Do not title the property in your name. This is common sense to most, as you are using investing funds to acquire the purchase. Additionally, your self-directed IRA administrator should ensure the title is properly written. But, it is critical that you know the title must be in the name of the IRA. For example, the name should appear on the deed as Advanta IRA FBO John Doe (your name) IRA #12345 (the account number of your IRA).

2. Do not purchase property from or sell property to a disqualified person. Disqualified persons include: you, your spouse, your lineal descendants (i.e., parents, grandparents, etc.) and their spouses, as well as lineal ascendants (your parents, grandparents, etc.). Anyone who provides service to the IRA (including fiduciaries, investing advisors, and managers) and any entity in which the IRA owner holds a 50 percent or more interest are also deemed disqualified.

3. Do not vacationing in a rental property owned by your IRA. While this can be tempting, especially if you own a vacation property in a cool, tropical locale, doing so would be fateful. Think of it this way—the benefits your IRA provides are meant for you to enjoy when you retire and not before. If you vacation in the property, that would be considered a contribution—which you cannot take until retirement age. See how this matters? So, just don’t take the chance.

4. Do not pay expenses for the property with your personal funds. You are also unable to personally receive income generated by the IRA-owned property. All income and expenses must flow into and out of the account’s funds.

5. Do not provide sweat equity (i.e., rehabbing a property yourself, performing maintenance duties) to facilitate the property’s necessities. Sweat equity is considered a contribution—one which cannot be properly assessed, and which, therefore, cannot be conducted. Hire a third party to perform any tasks or renovations.

Real estate assets offer a wide platform for self-directed investors to utilize to build retirement income. Learn more by visiting our Real Estate Investing Center.

If you have questions about this article or wish to learn more about real estate in an IRA, please contact us.