Shirley and Neil are married and they both have IRAs, They decided to buy a rental property jointly using both of their IRAs. They directed their IRA custodian to buy the house for an undivided 50% interest for each IRA. They were happy with the price they paid and they knew the property would grow in value in the area they had bought in. They rented the house out to a nice couple, who agreed to pay a 5% increase on their lease each year. Every thing was going along nicely, and for three years the tenants paid the rent on time, and looked after the house as if it were their own, then the husband was transferred, decided not renew the lease, and the house stood empty for four months.

Shirley's daughter Judith was going to college and needed a place to live, so Shirley rented the house to Judith and three of her classmates. They thought it was a great solution, the money started coming in regularly again. Each month Judith collected the money from her room mates, and paid the money into Shirley and Neil's IRA. One month Judith collected the rent and paid it into the bank using her own check. The bank rang Shirley to ask what the check from Judith was for. Shirley told the bank it was the rent payment for the property. Unfortunately this was a prohibited transaction, because Judith is a family member, she is a disqualified person and could not reap any benefit from Shirley and Neil's IRA. She could not even share the house with anyone else. Disqualified persons including family members can not benefit from a self directed IRA real estate plan. This includes the use of a property the IRA owns.

Shirley And Neil wanted to buy a timeshare/condo at a upbeat resort, because they liked the income potential, so they bought one using their self directed IRA real estate plan and leased it out through a servicing company. The income from vacationers was steady and the chances of the income increasing yearly was good. Because Shirley's income at the time was under $100,000.00 per year, she decided to roll over her traditional IRA to a self directed Roth, then the income from the condo would be tax free forever, as would any other investments she made.

Shirley liked the area the condo was in, and after a year had passed, decided to take a holiday in their time share, and accordingly made reservations for the condo through her leasing agent. The leasing agent sent details of her arrangements to her IRA management custodian, who straight away got in touch with Shirley and told her she would have to cancel her reservation for her vacation as the personal use of her condo, even on a timeshare basis, was a prohibited transaction. Shirley's custodian told her she could potentially lose her entire Roth IRA if she carried on with her vacation. However her custodian offered her a alternative solution, Shirley could rent any other unit that neither she or any other disqualified persons had an interest in. It would not be illegal, and Shirley's IRA would not be risking being treated as a disqualified transaction, with the subsequent tax and penalties. Shirley and Neil had a great holiday in someone else's condo, and decided to vacation there every year.

I will write about more things to avoid when you are investing in self directed IRA real estate tomorrow. As usual if you find these rules and regulations too much trouble you can have a more TURNKEY solution to investing in real estate with your IRA by clicking on the url at the bottom of this article and going to my website, there you will find much more information.