With a self directed IRA there are a number of prohibited actions which are of vital importance to understand. If you do not follow the rules and regulations carefully you could find yourself in a tough legal situation.
Prohibited actions
The prohibited transactions are:
a) A transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person; b) Any act of a fiduciary by which plan income or assets are used for his or her own interest; c) The receipt of consideration by a fiduciary for his or her own account from any party dealing with the plan in a transaction that involves plan income or assets; d) The sale, exchange, or lease of property between a plan and a disqualified person; e) Lending money or extending credit between a plan and a disqualified person; f) Furnishing goods, services, or facilities between a plan and a disqualified person.
The consequences
If you, as an IRA holder, are found to have taken part in a prohibited transaction, then any money in your IRA will be considered fully distributed and your account will no longer exists. The following taxes and penalties which ensue will be heavy and will apply to any assets you owned from the beginning of the year that the prohibited transaction started.
The disqualified person involved with the prohibited transaction is expected to pay for the transaction plus a tax amount of 15% of the transaction amount for every year, or part of a year, that this illegal activity was allowed. A further tax of 100% of the amount is charged if the transaction is not amended within the time of the taxable period. Both of these taxes must be paid for by the disqualified person who took part in the transaction. If there was more than one person involved then each person might be expected to pay the full amount.
In terms of the taxable period, this begins when the transaction started and finishes on whichever day is earliest out of:
a) When the IRS posts a notice concerning the tax deficiency; b) When the IRS reviews the tax; c) When the transaction has been amended.
The amount that will have to be paid must be which is ever greater out of:
a) The fair market cost of the property supplied plus the amount involved in the transaction; b) The fair market cost of the property received plus the amount involved in the transaction.
A solution
It is important to follow the rules as specified when dealing with a real estate IRA. If you need further financing then there is a form of IRA lending available. Although a normal recourse loan is not permitted, it is possible to apply for a non recourse loan. This is because a non recourse loan places the financial security in your real estate as opposed to the IRA. Therefore, when considering IRA lending, a non recourse loan is by far your safest and easiest option as well as providing you with greater leverage for your account.
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