What You Should Know About Self-Directed IRAs and Real Estate Investment
Self-Directed IRAs are, in many ways, ideal for investing in real estate. But, it’s helpful to understand the rules before you invest, in order to maximize your return on investment—in time and money.
This is where the rule of self-dealing comes in. Essentially, the IRS prohibits transactions in an IRA that benefit the owner before actual retirement. If you don’t follow this simple rule, you are subject to taxes on the offending transaction and additional penalties.
Self-Dealing in Real Estate Investment
Remember that buying property for your personal use is a misuse of your IRA investment:
- You cannot live in a house you purchased with your IRA.
- You cannot allow your family members to live in a house you purchased with your IRA.
- You cannot pay yourself a salary (for managing the property, for instance) from your IRA.
- You cannot put sweat equity into a house you purchased with your IRA.
- You can’t get any rental income from your IRA-purchased property.
When you think about this in the context of investment properties, these rules may seem somewhat irrelevant. But, it’s important to recognize where the gray areas lie in IRA investment, so that you can easily avoid them by hiring a property management company or by seeking other ways to distance yourself from the likelihood of reaping the kind of pre-retirement rewards that will cost you more in the long run.
What is the different between self-dealing and an indirect benefit?
Virtually nothing. The two terms are used interchangeably. It’s just important to know that both phrases refer to the same thing.
What about disqualified persons?
There are certain people who cannot receive money through your IRA investment or live in/on a property that you invest in through your IRA. Many helpful infographics can be found as used as quick reference, but it’s also worthwhile to visit the IRS FAQ on retirement plan investments.
Of course, choosing a trusted custodian for your self-directed IRA is paramount to ensuring you adhere to the rules, but knowing the basics to start with will only increase your likelihood of worry-