We all make mistakes. Unfortunately, making a mistake with your self-directed IRA can turn out to be very costly. Be sure to play it clean and get educated. Although there is much more to learn, 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 party and cannot use an IRA owed 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 be indirectly violating the prohibited transaction rules. 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. Yikes!
3. Can I do the maintenance myself on property purchased in my IRA? No, you cannot. When you do the work yourself you are using your labor to increase the value of your IRA owned assets, and this can lead to over contributing to your IRA. When work needs done on a rental property, it is best to pay a non-disqualified party to do the work. You will want to be sure that you compensate the party doing the work with IRA funds by submitting a Payment Authorization Letter to IRA Express for the payment.
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. This again 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 is the legal owner of the property, so income and expenses must go in and out of the IRA. Having a property manager is the best situation 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.