Real Estate Agents Investing With Self-Directed IRAs

Real estate agents investing with self-directed IRAs can make some mistakes with how they execute their self-directed investments.  I wanted to write this post after a recent seminar with real estate agents, which included real estate agents investing with self-directed IRAs.  The meeting was to introduce the benefits associated with real estate agents not only establishing their own self-directed retirement plan, but also the leverage they had by introducing this powerful tool to their clients and data base.

Anyone who has read my posts knows that, as a general rule, a self-employed individual (e.g., real estate agents) should establish a Solo-K vs. an IRA. Real estate agents investing with self-directed IRAs may be “leaving money on the table” compared to the benefits they could enjoy with the self-administered 401(k) plan. But, I digress as this post is not about which retirement plan an agent should establish.

From that meeting, I learned that a couple of real agents investing with self-directed IRAs were about to unintentionally enter into an IRS Prohibited Transaction related to their investment plans.  Being able to address what each of them were considering doing, they immediately recognized that they could not do what they had otherwise planned to do. What was their planned activities that would have resulted in at least one (and you only need one!) Prohibited Transaction:

1) The first agent was planning on being the buying agent with the sales transaction and, therefore, receiving a commission from the sale. Who wouldn’t want this! But, it is not a permissible transaction in this scenario and would be considered a “self-dealing” Prohibited Transaction. Remember, there are strict rules related to “self-dealing”, and this is probably the most violated Prohibited Transaction. In this case, the agent was not intentionally planning on violating the rule; however, the agent was just wasn’t thinking…and, thank goodness they caught themselves before ever proceeding down the “sales” transaction.

2) The second agent’s situation was slightly different, but still involved commissions. The agent did not have a self-directed retirement plan, but planned on being the buying real estate agent of record for a property to be purchased by their father’s self-directed IRA. It is obvious why a parent would choose to hire their child as their real estate agent; however, if this transaction would have commenced, the father’s IRA would enter into a Prohibited Transaction by transacting with his child….who is a disqualified individual to the father’s IRA (self-directed or not).

Interestingly enough, these types of Prohibited Transactions can easily occur with retirement plans that are not even self-directed! An example is when a parent hires their child to be the financial planner of their IRA investments. Again, natural to understand why this relationship would be desired. However, the child is a disqualified individual to the parent’s IRA and, as such, can not transact (let alone be compensated) with the parent’s IRA in any way.

To keep it simple…when making the investment choices for your self-directed IRA or self-administered 401(k), you cannot have any personal interaction or benefit from the transaction, nor can the retirement plan benefit in any way from your role with the plan. You are strictly making the investment choices, and choices that meet all IRS and DOL Prohibited Transactions.

As always, the information provided is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. You must always consult with respective professional in all such matters.