Those searching for a safe way to invest retirement funds often turn to self-directed IRAs. Whether you’ve had this type of retirement account for decades or just a few years, you may choose to put it toward real estate.

Here are some do’s and don’ts of investing in real estate with your self-directed IRA:

Do not participate in prohibited transactions

A prohibited transaction is any transaction between your retirement account and a “disqualified” person or entity. A “disqualified” person could be any of the following:

  • Yourself
  • Your lineal descendants (children or grandchildren)
  • Your lineal ascendants (parents or grandparents)
  • Your spouse, your spouse’s lineal descendants, or your spouse’s lineal ascendants
  • Any entity for which any disqualified party owns at least 50 percent
  • A fiduciary (attorney, CPA, Registered Investment Advisor, or Certified Financial Planner)

The term “prohibited transaction” includes any direct or indirect:

  • Sale, exchange, or leasing of any property between your retirement account and a disqualified person (i.e. you cannot personally guarantee a loan for a real estate purchase by your retirement account)
  • Lending of money or another extension of credit between your retirement account and a disqualified person (i.e. you cannot loan money from your IRA to your child)
  • Furnishing of goods, services, or facilities between your retirement account and a disqualified person (i.e. you cannot personally make an improvement to a rental property held by your retirement account)
  • Transfer or use of the income or assets of your IRA by or for the benefit of a disqualified person (i.e. you may not stay in a vacation property that’s owned by your retirement account)
  • An act by a disqualified person who is a fiduciary whereby the fiduciary deals with the income or the assets of your account in his own interest or for his own account (i.e. you cannot loan money from your retirement account to your CPA)
  • Receipt of any consideration by a disqualified person, who is a fiduciary from any party dealing with your retirement account, in connection with a transaction involving the income or assets of your retirement account (i.e. you cannot pay yourself any income from profits generated from the rental property held by your retirement account)

Here’s the thing: Participating in a prohibited transaction can result in very large penalties, including the full distribution of your account as income. You will also incur an additional 10 percent tax penalty if you are under age 59 ½. Please refer to IRS Publication 590 for more information about prohibited transactions.

Do pay property tax and other property-related expenses using your IRA

Using non-IRA (personal) money to pay for property tax payments or other expenses is a prohibited transaction. Because any property held within your IRA is owned by the IRA, all property tax payments must be paid out of said retirement account. This also applies to other property-related expenses such as utility bills, homeowners’ association fees, repair bills, and contractor bills.

Keep in mind that all of these bills and expenses must be paid out of your IRA. To pay a property tax bill or other expense, send a copy of the bill along with an Expense Payment Request form to IRA Services Trust Company.

Do provide annual property valuations

It is your responsibility to provide IRA services Trust Company with a valuation of your real estate property at least once a year. As a courtesy, you will be contacted during the last calendar quarter of each year to request an updated fair market value.

Ask us about completing our Real Estate Variation form to report the fair market value.