Associate attorney, Estill & Long LLC, Denver
Many real estate investors have heard about the benefits of using self-directed individual retirement accounts to fund their latest ventures into the real estate market. There are many companies conducting seminars and webinars that sell the investor on this idea. I know firsthand because our office receives the very same marketing material. While the current state of the law does seem to allow for these transactions, unfortunately many investors are not aware of the limitations that the tax code imposes on these types of transactions. In this article I’ll explore two considerations every investor should be aware of before using a self-directed IRA to invest in real estate: 1) prohibited transactions and 2) unrelated business income tax.
The danger of prohibited transactions. To begin, I’d like to share a quick word about the danger and what’s at stake. The tax code (specifically 26 USC § 4975) is written in such a way that there are numerous “prohibited transactions” in which an IRA is simply not allowed to engage. If an IRA moves forward with one of these transactions, the ramifications are enormous. If you believe you may be in danger of running afoul of these rules (or maybe you think you’ve already broken a rule), then speak to your tax adviser as quickly as possible to explore your options and the full extent of the penalties that you may face. There are strategies to minimize the impact, but it is critical to be proactive and correct the transaction quickly!
Read the entire article in the Dec. 16-Jan. 5 issue of the CREJ.