IRA Prohibited Transaction Rule: No Personal Benefit To IRA Owner – Video
John Hyre: We don’t like services. What’s another prohibited transaction I want to emphasize with you guys? You can never, never use the IRAs assets or income for your personal benefit. Never use it for your personal benefit. There’s really two separate people. There’s the IRA and it’s supposed to benefit itself, and then there’s you. By the way, your family’s pretty much you. If you benefit your family with your IRA, is that like benefiting you? Yes.
What’s some examples of personal benefits? Let’s start with Uncle. I get this all the time. “John, my IRA is going to lend money to my uncle”, or, “My IRA is going to hire my uncle to do rehabs. I read the rules John, Mr. Close-minded.” My uncle is not an ancestor or a descendant, at least not in most states. He’s not my spouse, so I can lend money to my uncle. I can hire my uncle.
Let me ask you this. Is there an argument to be made that hiring your uncle is a benefit to you by benefiting your uncle? Is there an argument to be made that lending money to your uncle, especially if for some reason he needed it, could be a benefit to you because it benefited family? Yes. Here’s the problem with the personal benefit argument. You have to prove the IRS wrong. The way the burden of proof works in court, if the IRS asserts a personal benefit, you have to prove there was none.
I had a case where the guy made a loan to his girlfriend. Personal benefit? Can you imagine the testimony? Your honor, I didn’t get any extra, and if I did, it was lousy. No benefit. Thankfully, the IRS at that time wasn’t sharp enough to make the argument. They’re learning quickly. I don’t want you to do anything that could look like a personal benefit. There’s an audit going on right now that I got called to consult on where the guy made a loan to his brother but the guy works for the brother’s company. If the loan helps the company, does it help my client keep his job? Is that a personal benefit? Clearly.
There was a court case out there, decided court case where a guy made a loan from his IRA to three corporations that he owned a small percentage of. His ownership was 4%, 9%, and I think 18%, if I remember right. They’re all way below the 50% line that everyone quotes at me. Because there’s a rule that says you can’t lend to a company that you own 50% or more of.
Now think from your Logic 101 class. If I say you cannot lend to something you own 50% or more of, does that mean I’m approving of a loan to something less than 50%? No. The court ruled that him lending from his IRA to companies in which you had a minority interest was a personal benefit to him. It’s a very broad term.
I don’t want you to do anything that could even look like a personal benefit to you or family. I don’t even want it to look that way. Let’s just not go there. Because how much are we protecting? Remember those number? We’re protecting something big, and dare I use the word, beautiful. Condo owned by IRA, another example. Your IRA owns a condo. What happens if you sleep in it one night? Boom. Dead. What if your spouse sleeps in it? Boom. Dead. What if your mistress sleeps in it? Dead. What if you’re married to a Latin female? Everybody dies.
What if you rent the property to your boss? You have a W-2 job, you have a self-directed IRA, or 401k, or whatnot. You rent the property to your boss for the same price everyone else pays. Personal benefit? The IRS can argue that you’re just buttering up your boss by giving him access. Just don’t go there. Rent the thing to the public, to third parties. Just don’t go there. Don’t even give the appearance. There are more prohibited transactions. These are the big ones that I find that real estate investors stumble on.