Many people invest in a real estate IRA because it offers multiple tax advantages compared to the basic real estate investment. The advantages also come with rules and regulations that you must follow to the core so that the internal revenue service can remain compliant in maintaining these tax advantages. If you break the rules, you could face some penalties and taxes given you are the account owner.
Below are some common mistakes you should avoid when you have a self directed IRA
Accepting the rental income personally
Owning real estate property through tax advantage retirement account does not allow you to take the personal gain from the investment until retirement distributions are made. in simple form, the IRA and investments are viewed as two different entities and there is a clear line between you and the retirement account. If you purchase a property through a self directory retirement plan, you must maintain it through the same plan.
This means that the costs associated with the property should be paid through the account. All these rules should apply to the rental income you get from the real estate property. You cannot accept a personal check from a tenant; you should direct them to write it to your IAR. You could face some serious penalties of the funds from your real estate property passes through you before going to the IRA.
Avoid transactions with people who are disqualified
In relation to yourself directed IRS, some people are considered to be disqualified. Dealing with disqualified individuals can lead to the prohibition of transactions. For instance, your family members are not qualifies when it comes to the IRS. This means you cannot use the investment money to purchase any form of real estate from them. Family members include all the ascendants and descendants in your lineage. Selling, renting, and repairs on your IRA properties by family members is also prohibited and you can face serious penalties when you go against these rules.
Do not perform services on the property yourself
As I mentioned above, you are disqualifies when it comes to involving yourself with any direct services with the IRS property. This means that you cannot provide any form of personal services in the properties without risking any form of illegal transactions. Cleaning, maintenance work and simple repairs that require outside help are also out of boundary. The IRA hires property manager to take care and manage the property. Even so, it is good to have professional and service providers to handle these kinds of issues.
Do not do anything that will mess with your finances
Because of the rules set up and all the costs, the IRA property payment is made directly from your account. Most investors will find it convenient to have a reserve in their accounts; these funds will be in charge of handling all the expenses. If you do not have money in your account, you will have to sell some of your assets to provide the IRA with the funds.