Can I Use My Self-Directed IRA to Purchase My House?

 

The majority of people have the bulk of their net worth held inside qualified accounts like an IRA or 401k.  Some reports estimate that there are over seven trillion dollars held inside individual retirement accounts (IRA’s).  This has many investors looking to set up a Self Directed IRA to purchase non-traditional assets in their qualified plan  (i.e. real estate), as opposed to the traditional stocks, bonds, and mutual funds. Many people inquire about setting up Self Directed IRAs to purchase their primary residence. Is this possible?

In the simplest form, the answer is no.  The touchiest aspect of Self Directed IRAs is what the IRS calls a prohibited transaction.  A prohibited transaction is when the IRA holder directly or indirectly transacts, e.g. buys, sells, trades, borrows, or exchanges, with a disqualified person. Who is a disqualified person? A disqualified person is the IRA holder themselves, and/or any lineal ascendants or descendants.  This includes the IRA holder’s grandparents, parents, children, grandchildren, and great-grandchildren.  Even the IRA holder’s financial advisor could be considered a disqualified person.

In the scenario above, you have the IRA holder using qualified assets to purchase their OWN residence.  Since the IRA holder themselves is considered a disqualified person then that my friends, sounds like the definition of a prohibited transaction.  The IRS would most likely completely disqualify the IRA and penalties would be bestowed upon the IRA holder. The IRS wants a Self Directed IRA investment to be a complete arm’s length transaction.

The purpose of Self Directed IRAs is NOT to benefit the IRA owner but to benefit the IRA ONLY.  If you set up a Self Directed IRA to purchase real estate always remember that it is an investment and it needs to be a complete arm’s length transaction.  No disqualified person (as described above) may directly or indirectly benefit from the property (this includes living in the house).  Setting up a Self Directed IRA properly and using it to purchase real estate is a beautiful investment.  It can provide diversification outside of the traditional investments, e.g. stocks, bonds, and mutual funds.  If you do not follow the rules it can, and will be a disaster.  Always consult with your tax or legal advisor prior to using qualified funds to invest and to obtain additional information on whether or not your IRA may be transacting with a disqualified person.

We recently did a google hangout on this topic with financial advisor Ted Jenkin from Oxygen Financial.  To watch the video click here http://bit.ly/1DvcAHU. At Premier Trust we can be a custodian for Self-Directed IRA’s.

 

If you have any questions or would like any information email us at info@premiertrust.com or call us at 702-577-1777. Work with a Company You Can Trust.