Self Dealing Rule

Your IRA may not buy an investment from or sell an investment to a disqualified person as defined by Internal Revenue Code Section 4975.  To do so is known as “self dealing.”

Additionally investments made with self directed IRAs must be at arms length, which is most often defined as a willing buyer and willing seller coming together with no undue influence from outside sources.

Disqualified Persons defined

Disqualified Persons are individuals or entities between whom or which an IRA is prohibited (absent a special exception) from engaging in any direct or indirect sale or exchange or leasing of any property; lending of money or other extension of credit; furnishing goods, services or facilities; or transferring to or permitting the use of IRA income or assets.

• Fiduciaries (which in the case of a self-directed IRA includes you, as the IRA owner);
• The following family members of the IRA owner:
• Spouse;
• Parents;
• Grandparents and Great-Grandparents;
• Children (and their spouses);
• Grandchildren and Great-Grandchildren (and their spouses);

 

[NOTE: The term “disqualified person” under the Internal Revenue Code does not include siblings (brothers and sisters) or aunts, uncles and cousins of the IRA owner.]

• Service providers of the IRA (e.g., IRA custodian, CPA, financial planner);
• An entity (such as a corporation, partnership, limited liability company, trust or estate) of which 50% or more is owned directly or indirectly or held by a fiduciary or service provider; also a 10% or more partner or joint venturer of such entity;
• Additionally, in the case of a SEP or SIMPLE IRA:
• The Employer;
• 50% or more owner of the Employer;
• Officers, directors, 10% or more shareholders, and highly compensated employees of the Employer;
• An entity 50% or more owned by the Employer;
• 10% or more partner or joint venturer of the Employer.

Note that you, as owner of the account, are a disqualified individual. In the eyes of the IRS, you and your IRA are not one and the same. Although the IRA is established to benefit you and your beneficiaries, it is truly a separate "trust."
An IRA CANNOT buy or sell investments from the IRA Owner.

Some examples of “Self Dealing”

• Having your IRA purchase real estate that you own presently.
• Having your IRA purchase real estate that is owned by a family member of lineal descent, such as your father.
• Issuing a mortgage on a relative’s new residence purchased by a family member who is a disqualified person as listed above.
• Granting a child a second mortgage for the down payment on his or her first home.
• Buying stock from the IRA owner (any transaction involving IRA funds and a “disqualified person” is prohibited).
• Purchasing stock in a closely held corporation in which the IRA owner has a controlling equity position or, if such corporation is the IRA owner’s employer, in which the IRA owner is an officer if the IRA is established pursuant to the employer’s SEP or SIMPLE program
• Purchasing restricted stock from a family member who is a disqualified person listed above.