If I purchase ranch land in my IRA, can I rent it to my personal ranch operation to generate income? Can I claim the expense in my ranch business and generate the tax deferred funds in the IRA?
Thank you for the creative self-directed IRA deal question.
According to Internal Revenue Code (IRC) 4975 the investment you are describing would be a prohibited transaction. You may also hear of these transactions, more commonly, known as “self-dealing prohibited transactions.” I have included the applicable areas of the tax code below, but allow me to dissect your proposed transaction.
First, who are disqualified persons to your IRA? Under IRC 4975, disqualified persons include: you to your IRA, your spouse, your children, grandchildren, parents, grandparents, and then entity (LLC, LP, Corp. Trust, or other entity) that is owned 50 percent or greater by one of the aforementioned disqualified persons.
Analyzing your deal:
1) Your ranch operation would be considered a disqualified person. Leasing the land between the ranch operation and your IRA, would be considered a prohibited transaction, see 4975(c)(1)(A) – sale, lease, exchange between the plan and disqualified person…
2) Furthermore, the IRA is a tax-exempt environment, so with this benefit, if you were to write off the lease payment through your ranch business, you could have additional IRS consequences.
3) The IRA must be used and invested for the “exclusive benefit” of the IRA - paragraph one of section 408 of the tax code…
(c) Prohibited transaction
(1) General rule
For purposes of this section, the term “prohibited transaction” means any direct or indirect—
(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;
(B) lending of money or other extension of credit between a plan and a disqualified person;
(C) furnishing of goods, services, or facilities between a plan and a disqualified person;
(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or
(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
For more details, see Internal Revenue Code 4975. It’s always recommended to speak to a financial advisor or tax professional before you enter into any investment.
National Education Specialist
Equity Trust Company
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