A self-directed IRA LLC is commonly used to invest in real estate such as family homes, commercial real estate, farm land, condos, and rentals.
As with all IRA investments, certain rules when investing an IRA LLC in real estate, and running afoul of the IRA prohibited transaction rules can result in serious tax consequences.
Examples of Prohibited Self-Directed IRA LLC Transactions
For example, it would be prohibited to engage the IRA funded LLC in the following transactions:
A lease between the IRA LLC and the son of the IRA owner
Ben’s IRA LLC owns a duplex. One of the tenants is Ben’s son, Matt. As a party-in-interest, Matt’s leasing of the duplex results in an IRA prohibited transaction because children are disqualified parties.
Sale or exchange or leasing of any property between the IRA LLC and a disqualified person
Ben holds a parcel of land in his self-directed IRA LLC. He now wants to build his primary residence. Ben wires funds from his IRA LLC bank account to purchase the land. This investment would result in a prohibited transaction because Ben falls under the disqualified party category. You are not allowed to build your own home on a parcel of land owned by the IRA LLC.
We’ve put together the following do’s and don’ts to help guide IRA LLC investors in the self-directed IRA LLC real estate investment process.