Prohibited transactions can quietly sneak up on you if you don’t know the IRA rules.
I received a call from a client today that I thought would make a great example for the blog as to what a prohibited IRA transaction looks like.
The client has an IRA LLC and is investing in homes that are being sold in auctions. The auction would not accept a bid from his LLC because it was registered in a different state. However, the auction would accept the bid in his own name.
His question to me was whether or not he could make the initial offer in his own name, make the purchase in his own name and then quit claim the property over to his retirement account?
Quite simply the answer is NO! You cannot sell anything that you already own personally to your IRA, as that would be considered providing benefit to your IRA and violates an IRS rule known as self-dealing. If the client were to purchase the property in his own name, then sell it to his IRA, it would be considered a prohibited transaction according to the IRS guidelines. You also cannot make any contributions to your IRA in anything other than cash. This means that the client could not buy the property in his own name and then assign or quit claim the real estate to his IRA because this would be a contribution of an asset other than cash, so again this investor’s strategy fails to align with the rules for what is considered allowable inside an IRA. Also, what this story teaches us is to make sure that before you purchase an alternative asset that you complete your own before you decide to commit to an investment.
Through your self directed IRA with Sunwest Trust, we allow you to invest in any type of investment other than what is not specifically prohibited by the IRS. Prohibited investments include life insurance and collectibles, etc. Anything other than life insurance and collectibles is generally acceptable, so long as you are not doing business with a disqualified party. A simple definition of a disqualified party is yourself, your spouse, any lineal family members, and their spouses.
Here is what the IRS says about Prohibited Transactions.
To see the IRS code regarding prohibited transactions and disqualified parties, click here: opens in a new windowIRC 4975 to review a PDF.
If you have additional questions about this subject, then please be sure to speak with a CPA or tax professional.