Can an IRA invest in a residence? What if the taxpyer lives in the residence and pays rent to the IRA? If so who can you get to be the trustee?
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IRS Trustee
According to IRS Pub 590, buying property for personal use (present or future) with IRA funds is a prohibited transaction. There is a penalty in addition to regular tax for using the IRA funds in a prohibited transaction.
Your question tries to skirt the issue by using the funds to buy rental property instead of personal use property. But then you want the taxpayer to rent the property from the IRA for his personal residence.
First off, I don’t think you would ever find a trustee that would do that. So I’m not going to spend anytime researching it. Nobody is going to do it for real, so I doubt there is any case law out there on record to settle the issue. The safe answer is, don’t do it. The second safe answer is, if you can find a trustee such as a bank or brokerage firm to manage the rental property, then go for it, but I know you can’t, so just move on. -
First off, I don’t think you would ever find a trustee that would do that. So I’m not going to spend anytime researching it. Nobody is going to do it for real, so I doubt there is any case law out there on record to settle the issue.
Don't be so sure. You'd be surprised at what trustees do. In fact, issues involving trustees account for more clients that I've fired over the years than any other issue.
The latest was a mom who is the trustee of her son's trust. The poor kid was permanently injured in an auto wreck and there was a big financial settlement. Some attorney told her to have the trust buy the family home. I'm not an attorney, but I think I might do a better job than this other guy at it. I talked to attorneys about it, and they all said "Run like heck [paraphrase]." Something about conflict of interest, fiduciary responsiblity, using trust money for the benefit of the trustee, not the beneficiary, silly things like that.
That's the problem. The person probably won't have a tremendous amount of difficulty finding someone to be the trustee. Legal? Ethical? Probably not. But it happens all too often.Comment
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Trustee
I think there is a difference between an IRA trustee, and your Joe average trustee set up for probate purposes. Trust accounts are set up all the time with simple boiler plate documents. IRA trustees are something that are regulated by all kinds of IRS rules and regulations. I don't know that you are going to find a bunch of fly by night outfits dealing with IRAs. The tax consequence between screwing up an IRA is quite a bit heavier than screwing up a trust set up merely to avoid probate.Comment
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