Pursuant to Internal Revenue Code Section 4975(c)(1)(C), the direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified person” is a disqualified person.
The IRA holder along with his or her lineal descendant are generally considered “disqualified persons”. In general, the IRA holder, and his or her grandparents, parents, children, spouse, daughter-in-law, brother-on-law and/or any entities controlled by such persons.
Example 1: John buys a piece of property with his IRA funds and hires his father to work on the property. Since John’s father is a disqualified person, John would not be permitted to provide any services to the IRA or its assets.
Example 2: Karen buys a home with her IRA funds and personally fixes it up. Since Karen, the IRA holder, is a disqualified person, she would not be permitted to provide any services to her IRA or its assets.
If an IRA holder is Providing Services to the IRA Asset (i.e the real estate) and not the IRA, is it still a Prohibited Transaction?
Yes. The Department of Labor’s (DOL) Plan Asset Rules essentially define when the assets of an entity are considered ‘Plan” assets. Under the rules, Self Directed IRAs are frequently viewed as pension plans subjecting them to the Plan Asset Rules. Under the Plan Asset Rules, if the aggregate Self Directed IRA or 401k Plan ownership of an entity is 25% or more of all the assets of the entity, then the equity interests and assets of the “investment entity” are viewed as assets of the investing Self Directed IRA/401(k) Plan. Thus, in the case of a Self Directed IRA LLC, since one or more IRAs will own greater than 25% of the entity, the assets of the LLC (i.e. real estate) would be viewed as assets of the IRA. Thus, fixing or repairing the property owned by the Self-Directed IRA LLC will be treated as providing services directly to the IRA.