Understanding Self-Dealing

When people first learn about Self-Directed IRAs (SDIRAs), one of the first questions that comes up is: ‍

“Can I take a property I already own and move it into my IRA, either by selling it to the account or contributing it directly?”

The answer is no. The reason has everything to do with IRS rules around prohibited transactions and self-dealing. ‍

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Why You Can’t Place Property You Already Own Into an IRA

While Self-Directed IRAs allow for a wide range of alternative assets, including real estate, there are important restrictions.

• Personal assets can’t be contributed: Your annual IRA contributions must be made in cash, up to the IRS contribution limits. You can’t “contribute” a house, land, cryptocurrency, or other personal property as part of that process.
• You can’t sell personal property to the IRA: Even if you own a property free and clear, you cannot sell it to your own IRA. Doing so would create a prohibited transaction because you’d benefit personally from the transaction.

In short: your IRA can purchase new property from an unrelated seller, but it cannot absorb or buy assets you already own. ‍

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What Is Self-Dealing?

Self-dealing happens when the IRA owner, or anyone who the IRS considers a “disqualified person”, uses the IRA in a way that provides direct or indirect personal benefit. The purpose of an IRA is to grow retirement savings for the future, not to provide immediate perks or relief today. ‍

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Who Counts as a Disqualified Person?

• The IRA owner
• The IRA owner’s spouse
• Parents, grandparents, children, grandchildren, and their spouses
• Any entities significantly controlled by these individuals (like corporations or partnerships)

If your IRA transacts with any of these individuals, it generally violates IRS rules. ‍

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Common Real Estate Examples of Self-Dealing

• Selling your own property to your IRA
• Renting an IRA-owned property to your child or parent
• Using IRA-owned real estate as your vacation home
• Paying yourself (or another disqualified person) to manage the IRA property

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How Real Estate Can Be Purchased in an IRA

Although you can’t move existing property into your IRA, you can still use a Self-Directed IRA to buy real estate in the right way.

• The IRA purchases property from an unrelated third party.
• All expenses, such as repairs, taxes, and maintenance, must be paid from IRA funds.
• All rental income and sale proceeds flow back into the IRA.
• You and other disqualified persons cannot personally use or benefit from the property.

Handled correctly, this strategy allows you to diversify into real estate while maintaining compliance. ‍

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Why Consulting with a CPA or Financial Planner Matters

Self-Directed IRAs give you freedom, but they also come with responsibility. That’s why consulting with a qualified CPA or financial planner is so important.

• A CPA can help you understand the tax consequences of IRA investments, keep you on track with IRS reporting, and spot any potential compliance issues before they cause trouble.
• A financial planner can help you step back and look at the bigger picture. Even though real estate or another alternative asset may seem like a strong opportunity, it needs to fit with your overall retirement plan, risk tolerance, and cash flow needs.

By working with these professionals, you can make sure your SDIRA strategy aligns with your long-term goals, not just your immediate interests. ‍

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Final Thoughts

You cannot sell a house to your Self-Directed IRA or place property you already own into the account as a contribution. These actions would fall under self-dealing, which the IRS prohibits. However, your IRA can still purchase new real estate investments from unrelated sellers, giving you the opportunity to build retirement wealth in alternative ways.

Before making any decisions, take time to sit down with your CPA and financial planner. Their guidance can help ensure that your choices not only follow IRS rules but also make sense for your retirement strategy. ‍

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