Any Loops Holes Around Prohibited Transactions of Real Estate for Personal Use in an IRA?

Question: I am looking for a custodian for a client who wants to make a real estate investment in his IRA.  Quest IRA, Inc. was referred to me by my accountant.  I have a couple questions about the limitations of use of the property by the owner.

Specifically, the accountant mentioned there are some tricky provisions about using the investment for personal use, but it would appear from the articles on the Quest IRA, Inc. site that the property cannot be used at all by the owner, as a vacation home for example.  Is that the bottom line on the issue or are there a few loopholes with the provision?

Answer: Thank you for your inquiry.  Unfortunately, no, there are no loop holes to the restrictions against personal use.  Statutorily, Internal Revenue Code Section 4975 contains the prohibited transaction rules, which prevent, among other things, the direct or indirect:

(c)(1)(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;

(c)(1)(C) furnishing of goods, services, or facilities between a plan and a disqualified person;

(c)(1)(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;

(c)(1)(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;

Your client, as the owner of the account, is considered a fiduciary and a disqualified person, and of course the IRA is included within the definition of a plan under the statute.  Your client’s spouse, lineal ancestors (Mom, Dad, etc.) and lineal descendants (children, grandchildren, etc.) and their spouses, plus any corporation, partnership, trust or estate in which any of the above owns or controls 50% or more of are all disqualified persons and cannot enter into a transaction with or benefit from a transaction with your client’s IRA.

The prohibited transaction rules are intended to make sure that all transactions within the IRA are on an arms-length basis and that no disqualified person directly or indirectly benefits from the transaction except, of course the IRA owner when he or she takes a distribution from the IRA.

If we can assist you or your clients, please let me know.  Have a great day!

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