Investors in real estate can enjoy several tax advantages when making purchases with self-directed IRAs. However, there are rules and regulations that cause investors to make mistakes and in turn leave them facing significant penalties and taxes.
Any property purchased through an investor’s self-directed IRA should be maintained through the same account. All the property-related funds must be debited or credited to the IRA account, including funds from rental income. People usually tend to accept rent cheques in their own names before writing personal cheques to their IRA accounts. Avoid such an error to stay free of penalties and taxes.
Make sure that you know whom you’re dealing with because certain people may be disqualified from your self-directed IRA transactions. Purchase of property from a disqualified individual is prohibited, as is renting out a property to any disqualified individual. Even hiring a disqualified individual for repairing your property is prohibited. Your lineal descendants/ascendants and you are considered disqualified, so even the provision of personal services to your home comes with the risk of prohibited transactions. Disqualified parties cannot perform maintenance work, cleaning, or repairs that require help from outside, so hiring a real estate company for this purpose is advised.
Since all costs to do with the IRA property are supposed to be transferred from the investor’s IRA account, most people like to maintain a cash reserve as cover for unexpected expenses. If an IRA property of yours incurs damages worth $3000 and the cash available in the IRA account is only $1800, you may be faced with many choices such as selling assets to cover costs, leaving the property as-is until some cash is available, or taking a loan. Such dilemmas can be avoided by making sure that there is a cash-cushion in your account.