The Employee Benefits Security Administration (EBSA), a division of the U.S. Department of Labor, is authorized to grant individual exemptions from the “prohibited transaction” rules of the tax code and retirement laws.
As you are likely aware, certain transactions by an IRA or other retirement plan are prohibited. Typically these are transactions that would give the investor a dual benefit, e.g., as a retirement investment and providing a personal benefit. Generally, retirement plan investments must be “arms length” with solely a retirement investment purpose. Thus, buying a vacation property with an IRA that is periodically used by the IRA owner or his children is prohibited, regardless of its investment merit. However, the prohibited transaction rules disallow a wide range of retirement plan transactions, even many with a pure investment purpose or which are a superior retirement investment. It is these latter transactions that may be suitable for an exemption.
The exemption process is relatively little used, not well understood, nuanced, sometimes lengthy and often complicated. Let our knowledge and experience as attorneys improve your likelihood of success. We may even be able to guide your application toward an expedited process. Please call us for an evaluation of your transaction.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
What penalties will I face if I buy an investment property in my IRA, and then want to convert it to my principle residence ?
Speaking hypothetically of course, it would be deemed a distribution from your IRA. If you are under 59.5 years of age, that would be a 10% penalty. Remember, you will also have to include the value of the home in your taxable income. It would be a heavy hit. By the way, sorry about the delay in answering this. For some reason, I did not receive an email alerting me to your comment.
How can I as a Real Estate Bkr. & General Contractor manage my IRA & 401 real estate investment for REASONABLE commissions and rehab costs?
Hi John, we get this question often. Generally YOU cannot take fees for management of your IRA or 401k investments, as this would be considered a prohibited transaction between a fiduciary and the Plan by the IRS. Also, IRA and 401k investments must be passive in nature, so if you are considering regularly “flipping” properties in your retirement plans you may run into trouble. However, there may be strategies you can employ in your particular circumstances that might achieve a result that works for you. If you have any other questions or want to follow up, please contact our office.
can i have my self directed ira hold the mortgage on my primary residence?
No. Under Internal Revenue Code (IRC) §§4975(e)(2)(A) and (F), you, your wife, your children, and other vertical ancestors and descendants are “disqualified persons.” IRC §4975(c)(1) states that “prohibited transaction” means any direct or indirect—
(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;
(B) lending of money or other extension of credit between a plan and a disqualified person;
(C) furnishing of goods, services, or facilities between a plan and a disqualified person;
(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or
(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
See also ERISA 3(14)(a)(1), 29 USC §1106(a)(1).
my son in law is in construction am i to understand that he can not use his skills in any way ?
Hi William,
Here is the scenario/question. In January of 2009, I purchased an investment home for $500,000 with my self-directed 401k. I never stayed in or used the property. It was rented out for 2 years and all the profits were put back into the self direct IRA/LLC checking account. Today, about 2 years later, I have to move into the house. My question is: How do I do this legally? I know the $500,000 will be fully taxed (State and Federal) plus 10% penalty. Other than the tax payment, and 10% penalty, is there anything illegal (stiffer penalties) about doing this? (i.e. fines, jail, etc)? Also, do I have to go all the way back to January 2009 date and amend back tax returns? Or does this taxable event take place when I move in? (i.e. April 2011 and make quarterly estimated tax payment on June 15, 2011). I just want to understand the process. I’m ok with tax and 10% penalty, but anything more than that I will not proceed. Thanks so much for any info!
While we can’t give advice on individual factual matters without being retained, I would point out that prohibited transaction penalties can run as much as 100% of the amount at issue (IRC sec. 4975(b)) You also state alternatetly that it is a “self-directed 401k” and a “self direct IRA/LLC.” This also may affect how a use or trasaction is treated. Please see IRS publications 560 and 590, and/or hire financial professional to assess your individual facts and strategy.
John, we can only tell you what the law says (especially in public forum such as this). Proceed at your own risk/peril. There may be acts which the IRS or DOL are more concerned about than others but we cannot engage in an analysis of individual facts and risk without being retained.
I would like to purchase real estate with my IRA, rent it and take the rents as distributions for income and pay taxes on the income only. Is this possible?? the other question is if and when I would sell the real estate and would like to place the proceeds from the sale into a traditional ira (i.e., cd, annuity etc.), is this possible and how does one go about it. Would like to pursue this. How do I get started and with whom? Thank you.
Receiving rents from property in an IRA would be deemed a distribution from the IRA. Thus, for person under the age of 59.5, it would generally be considered an early distribution subject to a penalty and taxes. Regarding placement of property sale proceeds in an IRA, obviously if the property is already in an IRA, then the proceeds must go into that IRA to avoid a distribution. So I take your question to mean if the house is not in an IRA to begin with, can you place the proceeds in an IRA. The answer is yes, subject to the applicable annual contribution limits. Due to the age of this Post, I will now close the comments. If you have any further questions, please feel at liberty to call us.