Self directed IRA

[Howard Maidens]

I just learned about self directed IRAs and am extremely interested in this as an option. I was told that if I buy a house to rehab, that I am not allowed to do any of the work myself. That if has to be done by a licensed contractor. Can anyone verify this to be true, and why?

[Brian Eastman]

@Howard Maidens

Dimitri is correct. The IRS rules state that a disqualified party (you, spouse, lineal family, etc. per IRC section 5975) may not benefit from the IRA, nor may you benefit the IRA through the provision of goods or services.

The "why" you are inquiring about is that if you are providing free labor to the IRA, you are in effect making undocumented contributions to the IRA and boosting the amount of tax-sheltering as a result.

You can probably understand why the IRS would not have an interest in allowing folks to make and self-document contributions to a retirement plan "in-kind", as that would get out of control really fast.

Keep in mind, the rules were not written specifically with real estate in mind, but broadly as applies to the tax-sheltered nature of IRA money. As real estate investors, we need to understand the rules properly as they apply to the asset class we are investing in.