Client Example Concerning Prohibited Transations from Guidant Consultant Ryan Bateman

I was helping a client set up his Self-Directed IRA last week and came across some common issues. The client was looking to purchase a vacation rental condo that happens to be next to a condo he currently owns. When the client mentioned he would rent the condo out to family members once in a while, I had to remind the client that doing so would be considered what IRS calls that a "prohibited transaction" and that it was not an option. Under IRS rules the client and his wife, and their immediate family members (parents, grandparents, kids and grandkids) can not use or benefit from this rental property in any way. The client said it might only be for one night and he would charge them rent, but unfortunately it was still not a legal option.

After deciding that he would purchase the condo and refrain from letting it out to any family members, he decided to proceed with the investment. Because this client used all retirement funds to purchase the condo (no leverage), he was very happy to learn all that the rental income coming back to his real estate IRA would stay tax-deferred. His goal was to keep this condo for 10 years and then sell it for a profit. That income would also return to his IRA/LLC tax deferred, without incurring any capital gains.