A prohibited transaction, including prohibited real estate IRA investments, can bring into question the tax-deferred status of your account, potentially resulting in the disqualification of your IRA and severe tax consequences.
The following is the definition of a prohibited transaction that comes from IRS Publication 590 and speaks of those acts that you should avoid so as not to incur additional taxes and other costs, including loss of IRA status.
“Prohibited Transactions“
Generally, a prohibited transaction is any improper use of your traditional
IRA account or annuity by you, your beneficiary, or any disqualified person.
Disqualified persons include your fiduciary and members of your family
(spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).
The following are examples of prohibited transactions with a traditional IRA:
- Borrowing money from it.
- Selling property to it.
- Receiving unreasonable compensation for managing it.
- Using it as security for a loan.
- Buying property for personal use (present or future) with IRA funds.”
-Source IRS Publication 590
Further Information
- Section 4975 of the Internal Revenue Code – Internal revenue code referencing prohibited transactions with IRAs.