IRA Prohibited
Transactions
(Part 2 of a 2 part Post)
Read below for the final three subsections and real world examples of IRA Prohibited Transactions. If you missed the first part of this Post, see the Tuesday, May 6th for the first part of this Post.
(D) transfer to, or use by or for the benefit of, a
disqualified person of the income or assets of a plan;
Example 9: The IRA purchases a piece of rental real estate on Lake Dreamy. Although the IRA rents out the property for most of the year, the IRA account holder (or another disqualified person) uses the property for one week every July. Regardless, of whether the disqualified person pays the IRA fair market value rent or stays at the property for free, this is a prohibited transaction.
Example 10: Assume the same situation as Example 9 except that the property is rented to the IRA account holder’s brother or friend. Although a brother or friend are not normally going to be considered automatic disqualified people (assuming they do not have co-ownership with the IRA account holder in another business structure), there is a potential “conflict of interest” problem here. This is not an automatic prohibited transaction, but could be scrutinized by the IRS.
(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account;
Assuming the disqualified person involved in the particular transaction is considered a “fiduciary” of the IRA, many of the above examples also implicate this section of the code. It could certainly be argued that an IRA account holder that is also acting as the “Manager” of an IRA-owned LLC structure would be characterized by the IRS as a “fiduciary”.
(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
Example 11: The IRA purchased a piece of real estate. The IRA account holder (or another disqualified person) is a licensed real estate agent and collects a commission on the purchase.
This is a prohibited transaction regardless of whether the commission was reasonable under the circumstances.
As you can see from the discussion above, there are many fact patterns that can cause prohibited transaction concerns. For this reason, the first thing that I advise my clients to think about when considering any IRA (or IRA/LLC) investment is whether a potential prohibited transaction exists. If so, further analysis is required.
Example 9: The IRA purchases a piece of rental real estate on Lake Dreamy. Although the IRA rents out the property for most of the year, the IRA account holder (or another disqualified person) uses the property for one week every July. Regardless, of whether the disqualified person pays the IRA fair market value rent or stays at the property for free, this is a prohibited transaction.
Example 10: Assume the same situation as Example 9 except that the property is rented to the IRA account holder’s brother or friend. Although a brother or friend are not normally going to be considered automatic disqualified people (assuming they do not have co-ownership with the IRA account holder in another business structure), there is a potential “conflict of interest” problem here. This is not an automatic prohibited transaction, but could be scrutinized by the IRS.
(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account;
Assuming the disqualified person involved in the particular transaction is considered a “fiduciary” of the IRA, many of the above examples also implicate this section of the code. It could certainly be argued that an IRA account holder that is also acting as the “Manager” of an IRA-owned LLC structure would be characterized by the IRS as a “fiduciary”.
(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
Example 11: The IRA purchased a piece of real estate. The IRA account holder (or another disqualified person) is a licensed real estate agent and collects a commission on the purchase.
This is a prohibited transaction regardless of whether the commission was reasonable under the circumstances.
As you can see from the discussion above, there are many fact patterns that can cause prohibited transaction concerns. For this reason, the first thing that I advise my clients to think about when considering any IRA (or IRA/LLC) investment is whether a potential prohibited transaction exists. If so, further analysis is required.
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