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Prohibited Transactions on a Self-Directed IRA Loan
By Jason Taken · Principal
Family deals, sweat equity, and mixed personal funds can disqualify a self-directed IRA property loan. The lines to hold before you apply now.
The loan can be perfect and the account can still be ruined by a weekend of drywall. Prohibited transactions are not a paperwork technicality at the end. They are rules about who the IRA may deal with and who may benefit. Break them and the IRS can treat the entire IRA as distributed. The tax is on the account, not on a single invoice.
The official categories are on IRS Retirement Topics — Prohibited Transactions. This article applies those categories to a financed property. It is not a substitute for a prohibited-transaction opinion on your vendors.
Account basics sit on what is a self-directed IRA. The guarantee problem has its own piece: why you cannot personally guarantee the note.
Who you cannot transact with
A disqualified person includes you, because you direct the investments. It also includes your spouse, your parents and grandparents, your children and grandchildren, and the spouses of those children and grandchildren. That list comes from the family rule tied to fiduciaries. Siblings, cousins, aunts, and uncles are not on that statutory family list. A brother-in-law is not automatically disqualified just because he married your sister.
Do not turn that into a loophole speech. Indirect deals count. If the IRA buys your son’s house, the relationship is the problem even when a title company is in the middle. If you route a contract through a friend so your spouse can be the real seller, the IRS looks at the substance. Have a lawyer who handles these accounts read any contract where a relative is on the other side, including relatives who are outside the statutory list. “Not on the list” is not the same sentence as “safe.”
The banned transaction types that show up on property files:
- Sale, exchange, or lease between the plan and a disqualified person
- Lending or any other extension of credit between the plan and a disqualified person
- Furnishing goods, services, or facilities between the plan and a disqualified person
- Transfer or use of plan assets for a disqualified person’s benefit
- A fiduciary dealing with plan assets in their own interest
A personal guarantee is the credit category. Peek v. Commissioner is the case lenders and custodians cite. Details and what non-recourse has to say in the note are in the guarantee article linked above. This article is about the other ways the same statute shows up once the property is under contract.
Work you cannot do yourself
The IRA may hire a contractor. The IRA may not hire you. Painting, flooring, trash-out, lawn care, and “I’ll just manage the GC for free” are services furnished by a disqualified person. The account is supposed to pay an unrelated third party.
Investors who flip in an LLC are used to sweat equity as profit. Inside an IRA, that habit is the violation. The custodian will not “reimburse” you for Saturday labor. There is nothing to reimburse. The labor should not have happened.
Materials follow the same line. You do not buy the vanities on a personal card and submit the receipt. The contractor or the supplier invoices the IRA or the IRA-owned LLC. The custodian pays, or the LLC pays from an account that holds only IRA funds. A personal credit card, even one you pay off from the IRA next week, mixes the two pools.
Who may be the contractor: an unrelated company. Who needs a second look: any company owned by family, including family outside the strict list. Who may not be the contractor: you, your spouse, your children, or their spouses. Flip workflow with third-party draws: fix and flip loans inside a self-directed IRA.
Personal use is not a small exception
You cannot live in the house while you “keep an eye on the rehab.” You cannot park a boat in the garage, store holiday decorations in a bedroom, or let a child stay there between leases. You cannot rent it to your parents at a “fair” number you picked. A lease to a disqualified person is a prohibited transaction even when the rent looks like the market.
Vacation use is the same rule. One week in the IRA’s cabin is enough to be a problem. The property is an investment the account owns. It is not a perk of directing the account.
Utilities and insurance have to match that story. The named insured should be the custodian for the benefit of the IRA, or the IRA-owned LLC, not you as a homeowner. If the power company will only open service in a personal name, solve that with the custodian and the title company before funding. Do not put the bill in your name and “sort it out later.”
Money that cannot cross the line
Every dollar in and every dollar out belongs to the IRA. That includes earnest money, down payment, lender points, interest, taxes, insurance, and rehab draws. Personal funds cannot front any of those, even as a short loan to the account. How to add the dollars up: cash the IRA needs to close.
Three patterns that look like convenience:
- You pay, the IRA repays. Repayment does not erase the extension of credit you already made to the plan.
- The IRA pays, you keep the receipt’s rewards. Points, rebates, or a contractor discount steered to you are a personal benefit from plan assets.
- Sale proceeds hit your account first. The buyer should pay the custodian or the IRA LLC. A wire to you “to make the payoff easier” puts plan money in your pocket.
Loan proceeds are plan assets too. You do not take a distribution of the draw to fund a personal project, and you do not use IRA loan proceeds as the down payment on a house you will occupy. Owner-occupied financing is a different product entirely, and this firm does not make those loans. The first-time homebuyer withdrawal rules are also a different topic: IRA exemptions and the $10,000 homebuyer rule.
Indirect deals and “fair market value”
People sometimes say a transaction is fine if the price is fair. Fair price does not cure a deal with a disqualified person. The statute bans the transaction. It does not say the transaction is allowed when an appraisal looks reasonable.
The same idea covers services. Paying yourself “what a GC would charge” is still you furnishing services to the plan. Paying your spouse’s company the going rate is still a deal with a disqualified person.
Indirect is in the statute on purpose. A straw buyer, a friend’s LLC that you secretly control, or a contract assigned to the IRA after you negotiated it for yourself can all be examined as your deal. If you want the IRA to buy it, the IRA (through the custodian or the IRA LLC) should be the buyer from the offer forward. Assignment into the account at the last minute is a question for counsel, not a clever close.
What a clean financed deal looks like
A file that can survive both a lender and a custodian tends to look like this:
- Offer made by the custodian or the IRA-owned LLC, not by you personally
- Earnest money wired from IRA funds
- Non-recourse note, no guaranty by you or your spouse
- Contractor agreement with an unrelated firm, invoices to the IRA
- No one in the disqualified group lives in or uses the property
- Insurance and utilities aligned with title
- Exit is a sale or a payoff that lands back in the account
- No plan to refinance into a DSCR loan inside the IRA
Jaken Finance Group’s IRA files are hard money and bridge, priced on qualified deals at 8.99%–13.5% interest-only. They are not DSCR at 5.75%–10.5%. If the business plan needs a rental mortgage in an LLC, do that outside the retirement account. Wrapper comparison: land trust vs LLC vs IRA.
Custodians differ on how strictly they review vendor lists. Some will flag a family name. Some will not. The IRS does not outsource the rule to the custodian’s checklist. You still own the compliance. Start that review before the offer, using the custodian checklist.
Apply on the card that matches the job
Prohibited-transaction hygiene does not change which form fits. It changes whether you should submit at all.
When the structure is clean, open what’s the deal you’re working on. A rehab inside the IRA belongs on Fund my fix & flip or fix & hold. A purchase or a contract-date bridge without that rehab belongs on Buy a property or bridge a close.
Do not choose cash-out, HELOC, or a rental refinance. Those paths assume a borrower we can treat as an LLC or an individual on a rental product. An IRA is neither of those for DSCR. Questions on a specific vendor or a guaranty page: (833) 264-7776.
Keep the IRA out of the deal’s personal side
Hire an unrelated contractor, pay every invoice from the account, and keep your family out of the property. Then use the deal menu and select the flip card or the purchase card. Leave refinance and HELOC alone.
Rates, terms and conditions offered only to qualified borrowers and are subject to change at any time without notice. Closing times are in business days and commence upon receipt of appraisal payment and satisfaction of borrower conditions. Closing times may be delayed due to appraiser property access. All loans are subject to full underwriting for loan approvals. Jaken Finance Group only finances non-owner occupied investment properties. This article is not tax, legal, or investment advice.
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Jaken Finance Group, 2300 Barrington Road, Suite 400, Hoffman Estates, IL 60196