What transactions are prohibited in a self-directed IRA?

Prohibited transactions under IRC Section 4975 are the most significant compliance risk in self-directed IRA real estate investing. The consequences of
getting this wrong are severe: the entire IRA is disqualified and treated as fully distributed in the year of the violation, creating a large taxable income
event and, if you’re under 59.5, a 10% early withdrawal penalty on top.

The rules are built around the concept of “disqualified persons.” Your IRA cannot transact with you, your spouse, your parents, your grandparents, your children,
your grandchildren, the spouses of your lineal descendants, any entity you control more than 50% of, or any IRA fiduciary or service provider.

Buying property you already own and selling it to your IRA. Even at full fair market value, the transaction itself is prohibited.

Buying property from any disqualified person. Your IRA cannot purchase your sibling’s rental house, your parent’s investment property, or any real estate
owned by an entity you control.

Personally using property your IRA owns. You cannot stay overnight in a vacation home your IRA holds. You cannot conduct business from an office in a building
your IRA owns.

Having disqualified persons perform paid services. Your child cannot manage the property. Your spouse cannot handle maintenance and bill the IRA. All service
providers must be unrelated third parties.

Personally guaranteeing any IRA loan. All financing inside the IRA must be non-recourse. Signing a personal guarantee on an IRA real estate loan makes it
recourse and constitutes a prohibited transaction.

Borrowing from the IRA personally. You cannot take money from the IRA as a personal loan, regardless of your intent to repay.

The only way to reliably avoid these violations is to consult with an SDIRA-experienced attorney before executing any transaction. The rules are
unambiguous and don’t have good-faith exceptions.