Things to Avoid with a Self-Directed IRA Real Estate Plan

Shirley and Neil are married and both have IRAs. They decided to buy a rental property together using their IRAs. They ordered their IRA custodian to buy the house for 50% undivided interest to each IRA. They were happy with the price they paid and knew that the property would increase in value in the area they had purchased. They rented the house to a nice couple, who agreed to pay a 5% increase in their lease each year. Everything was going well and for three years the tenants paid their rent on time and took care of the house as if it were their own, then the husband moved out, decided not to renew the lease, and the house was empty for four years. months.

Shirley’s daughter, Judith, was going to college and needed a place to live, so Shirley rented the house to Judith and three of her classmates. They thought it was a great solution, the money started coming in regularly again. Every month, Judith collected the money from her roommates and deposited the money into Shirley and Neil’s IRA. One month, Judith collected the rent and paid it at the bank with her own check. The bank lines up Shirley to ask what Judith’s check was for. Shirley told the bank that it was the rental payment for the property. Unfortunately, this was a prohibited transaction, because Judith is a family member, she is a disqualified person and would not be able to derive any benefit from Shirley and Neil’s IRA. She couldn’t even share the house with anyone else. Disqualified individuals, including family members, cannot benefit from a self-directed IRA estate plan. This includes the use of IRA property.

Shirley and Neil wanted to buy a condo/timeshare in a lively resort because they liked the income potential, so they bought one using their self-directed IRA real estate plan and leased it through a service company. Vacationer income was constant and the chances of income increasing annually were good. Because Shirley’s income at the time was less than $100,000.00 per year, she decided to roll over her traditional IRA to a self-directed Roth, then the income from the condo would be tax-free forever, just like any other investment she made.

Shirley liked the area the condo was in and after a year she decided to take a vacation from her timeshare and consequently made reservations for the condo through her leasing agent. The leasing agent sent the details of her arrangements to her IRA administration custodian, who immediately contacted Shirley and told her that she would have to cancel her reservation for her vacation as personal use of her condo, even in timeshare, was prohibited. a prohibited transaction. Shirley’s custodian told her that she could lose all of her Roth IRA account if she went on her vacation. However, her custodian offered an alternative solution, Shirley could rent any other unit that neither she nor any other disqualified person had an interest in. It wouldn’t be illegal, and Shirley’s IRA wouldn’t risk being treated as a disqualified transaction, with attendant taxes and penalties. Shirley and Neil had a great vacation at someone else’s condo and decided to vacation there every year.

I’ll write about more things to avoid when investing in real estate self-directed IRAs tomorrow. As usual, if these rules and regulations are too much trouble for you, you can have a more TURNKEY solution to investing in real estate with your IRA by clicking the URL at the bottom of this article and going to my website, there you will find a lot more. information.