Post a Comment On: CPA at Law

In a previous post, I described the basics of self-directed IRAs; in this post, I provide some examples of prohibited transactions with disqualified people. The following are the transactions that are specifically prohibited by the Internal Revenue Code and an example of each:

Selling, Exchanging, or Leasing Property

The owner of an IRA intends to invest in real property with his IRA, but before the self-directed IRA account is properly funded, the owner learns of an opportunity that he needs to act on quickly. He purchases a property from an unrelated party with his own funds and the next day transfers the property to his IRA at the same price. This is a prohibited transaction between the IRA and the IRA owner even if the IRA would have been allowed to make the exact same purchase directly from the unrelated party.

Lending Money or Extending Credit

The owner of an IRA wishes to invest her IRA in an asset but does not have enough cash in the IRA for an outright purchase. The bank agrees to a loan but only if the IRA owner agrees to personally guarantee the debt. This is treated as an extension of credit from the IRA owner to the IRA and as such is a prohibited transaction.

Furnishing Goods or Services

The owner of an IRA that leases a piece of rental property hires her son to repair a broken window on the property and the son does so for a fair market price. This is a prohibited furnishing of services by a disqualified person (the son) to his mother's IRA.

Use of IRA Assets by a Disqualified Person

An IRA owner decides to purchase a vacation home and have a management company lease it to third parties throughout the year. If the vacation home is owned by the IRA and the IRA owner allows his in-laws to stay in the home for a weekend, this is a prohibited transaction even if fair market rent is paid to the IRA.

Fiduciary Self-Dealing with the IRA

An IRA owner loans IRA funds to a corporation in which the IRA owner is a 35% shareholder. This is likely to result in a prohibited transaction even though the corporation is owned less than 50% by the IRA owner and is technically not a disqualified person. This is because the IRA owner is a fiduciary of the IRA and will likely be deemed to be dealing in his or her own interest.

Receipt of Consideration by a Fiduciary from Transacting with the IRA

An IRA owner, who is a licensed real estate agent, purchases real estate for his IRA from an unrelated party and receives a commission from the sale. Because the IRA owner is a fiduciary of the IRA and received consideration from transacting with the IRA, this is a prohibited transaction.

For further discussion and examples of prohibited transactions, please see Warren L. Baker's article on WealthCounsel's blog and this article by Strategic Property Exchanges, LLC.