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Prohibited Transaction Law & Cases | IRA/LLC Structures, Laws & Cases | Leveraging Your IRA, UDFI Tax, Law & Cases | IRA Tax on Non-Passive Income, UBIT Tax Law & Cases | Real Estate Investments With IRAs | Private Company Investments With IRAs | Self-Directed IRA Basics | Advanced SDIRA Topics, Law & Cases
Real Estate Investments with IRAs
Statutes
IRC § 4975 (c)(1)(B). A disqualified person (e.g. IRA owner) may not extend credit or guarantee a loan for their IRA’s investments.
IRC § 4975(c)(1)(C). While it is permissible to administer the investment, it is generally viewed impermissible to physically work on investment assets (such as rental real estate) since such actions can constitute a per se prohibited or self dealing prohibited transaction.
IRC § 4975(e)(2)G). For example, any lease to a company that is owned 50% or more by the IRA owner or other disqualified persons would constitute a prohibited transaction.
DOL PTE 80-26, 71 CFR 17917 Amendment to Prohibited Transaction Exemption 80-26 (April 7, 2006). In the event that an IRA becomes overextended and cannot pay its obligations, the IRA owner may rely on Department of Labor Prohibited Transaction Exemption 80-26, which allows the IRA owner to loan money to his or her IRA so that his or her IRA may pay obligations that it owe. This loan from the IRA owner to the IRA is specifically exempt from the prohibited transaction rules and is permissible so long as the following conditions are present: The proceeds of the loan to the IRA must be for the payment of ordinary operating expenses of the plan, including the payment of benefits in accordance with the terms of the plan (e.g., required minimum distributions) or a purpose incidental to the ordinary operation of the plan. Many practitioners take the position that a loan or other obligation incurred from an investment asset meets the criteria of an operating expense to the plan. The loan must be interest free and un-secured. The loan should not cost the IRA money or jeopardize its assets. Any loan over 60 days must be in writing. Most custodians who will allow an IRA owner to utilize PTE 80-26 will require a written agreement, regardless of the duration of the loan.
Opinions
| Citation: DOL Advisory Opinion 2006-01A, 29 CFR 2509.75-2 |
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Case Facts: Any investment structure whereby the IRA invests into a company (even when the IRA owns less than 50%) and the company is then required (or its sole purpose is) to lease to a disqualified person would constitute a prohibited transaction as the IRA’s investment cannot be made with the intent to benefit a disqualified person. |
| Citation: Department of Labor Prohibited Transaction Exemption 80-26 |
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Case Facts: DOL PTE 80-26, 71 CFR 17917 Amendment to Prohibited Transaction Exemption 80-26 (April 7, 2006). In the event that an IRA becomes overextended and cannot pay its obligations, the IRA owner may rely on Department of Labor Prohibited Transaction Exemption 80-26, which allows the IRA owner to loan money to his or her IRA so that his or her IRA may pay obligations that it owe. This loan from the IRA owner to the IRA is specifically exempt from the prohibited transaction rules and is permissible so long as the following conditions are present: The proceeds of the loan to the IRA must be for the payment of ordinary operating expenses of the plan, including the payment of benefits in accordance with the terms of the plan (e.g., required minimum distributions) or a purpose incidental to the ordinary operation of the plan. Many practitioners take the position that a loan or other obligation incurred from an investment asset meets the criteria of an operating expense to the plan. The loan must be interest free and un-secured. The loan should not cost the IRA money or jeopardize its assets. Any loan over 60 days must be in writing. Most custodians who will allow an IRA owner to utilize PTE 80-26 will require a written agreement, regardless of the duration of the loan. |
Misc.
CHECKLIST FOR IRA OWNERSHIP OF REAL ESTATE
- Is the contract and deed/title in the IRA’s name (e.g., ABC Trust Company FBO Sally Jones IRA)?
- Did the IRA custodian sign the contract and legal agreements for the IRA, or, where applicable, did the manager of the IRA/LLC sign them?
- Did the IRA owner refrain from using personal expenses in purchasing and maintaining the property?
- If the IRA obtained a loan to purchase the property, was the loan nonrecourse, and is the IRA owner aware of possible UDFI taxes on any net profits from the debt?
- Is the IRA custodian, the property manager, or a properly established IRA/LLC, receiving the rental income and paying the expenses for the property?
- Does the IRA have sufficient capital available to cover an unexpected property expense?
- Is the IRA owner holding the property for investment, and are the IRA owner and other disqualified persons avoiding personal use or benefit from the property?
- Was the broker or agent in the transaction (when applicable) a non-disqualified person? Did the IRA owner refrain from personally benefitting from the IRA’s purchase?
Blog Articles
How to Properly Purchase Real Estate with a Self-Directed IRA.
Managing a Rental Property Owned by Your Self-Directed IRA.
Tom W. Anderson
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Harry Veldkamp
Mat's books is a great reference guide for self-directed IRA investing – Best I’ve seen in 30 years of being in the business.
Pamela Constantino
Mat's book is an excellent resource for self directed IRA owners and their advisors. It is the first of its kind in our industry. Mat has truly written an “Authoritative Guide” for self directed IRAs.
Mark J. Kohler
Mat is truly an expert on self directed IRAs, and his book is the one book that every self directed IRA investor should read.
Richard Davis
I was referred to Matt for help in setting up an IRA owned LLC. Matt and his team did an incredible job completing the work in a few short days. The process was professional, efficient and cost effective. I continue to rely on Matt for guidance running the LLC and related real estate matters. Not only is Matt a good lawyer, he runs a great office. It is easy for me to recommend Matt and his team.
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We have used Matt for many legal matters and he always comes through with shining colors. I highly recommend Matt for any legal or tax matter.
Jennifer Cayton
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I have retained Mathew Sorensen several times for multiple real estate deals and have been very pleased with his efforts and work product and will continue to use him in the future.
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Mathew Sorensen is a great resource and I use him consistently for real estate law questions. He is a wealth of information and will always give you a great knowledge base. I have been using KKOS for a while now and am very impressed and happy with their services.
Kenneth P. Child
[Mat] is completely devoted to his clients and continually strives to stay abreast of changes and updates in the law. Mat is an unbelievably hard worker and...I don't hesitate to recommend Mat's services to anyone as I know he will take care of them and give them simple, concise, and straightforward solutions to any legal issue they may be facing.
K.M
I am a partner in a law firm in Chicago and I have worked with Mat on my personal real estate and business ventures. Mat has given me practical and wise advice which has helped me make profitable decisions. I highly recommend Mat.
Gary Shumm
Mathew is an excellent attorney, well versed in the Self-Directed IRA market…His ability to distil the complexities of the Self-Directed IRA so that the average person can understand them, and ensure that they don't get "tripped up" is second to none. Anyone interested in this Self-Directed IRA Market would do well to connect with Mathew and learn from the best.
Mat is truly an expert on self directed IRAs, and his book is the one book that every self directed IRA investor should read.
"Mat's book is an excellent resource for self directed IRA owners and their advisors. It is the first of its kind in our industry.
Mat has truly written an“Authoritative Guide” for self directed IRAs."
"Mat is an excellent attorney, well versed in the Self-Directed IRA market...His ability to distill the complexities of the Self-Directed IRA
so that the average person can understand them, and ensure that they don't get "tripped up" is second to none.
"Mat’s book is the most practical and comprehensive self directed IRA guide in our industry. Reading this handbook should be the first step for any alternative asset investor, investment sponsor, or trusted advisor that seeks to become informed about how to maximize the value of IRAs."
"Mat's books is a great reference guide for self-directed IRA investing – Best I’ve seen in 30 years of being in the business."
"The Self Directed IRA Handbook by attorney Mat Sorensen is the most comprehensive book ever written about one of the
best investment and retirement savings tools ever created: the Self-Directed IRA."
J.P. Dahdah
Mat’s book is the most practical and comprehensive self directed IRA guide in our industry. Reading this handbook should be the first step for any alternative asset investor, investment sponsor, or trusted advisor that seeks to become informed about how to maximize the value of IRAs.