In last week’s Blog, we explained potential tax problems arising from the purchase of certain assets in an IRA, only to find out that IRS has disallowed ownership in that form. One recent example involved the purchase of a Non-Fungible Token (NFT), which we explained in some detail. When an asset such as this is disallowed in IRAs, the purchase price of the disallowed asset becomes immediately taxable to the IRA owner. Should the asset have decreased in value, even if it becomes worthless, there is no relief granted to the taxpayer.
Other scenarios sometimes produce an even harsher result for the taxpayer, as IRS could declare the entire IRA invalid, with the entire account becoming immediately taxable as ordinary income. These events generally invoke the concept of prohibited self-dealing, often resulting from the purchase of real estate in an IRA. While not disallowed, IRA ownership of real estate must be and must remain, a totally arm’s length transaction. No interaction between the IRA real estate and the IRA owner is permissible. Generally, the IRA must be in the hands of a specialized Custodian, and costs are considerable.
Logically, this suggests a discussion of the definition of an arm’s length real estate transaction. Rules are actually quite simple—every facet of ownership and maintenance of the property while owned in the IRA must be handled only with IRA funds. The IRA owner is barred from using the property, performing repairs, maintenance, upgrades, or even cleaning. Any breach of this rule results in 100% of that IRA’s assets becoming immediately taxable as ordinary income.
Should the IRA real estate require funds beyond those available within the IRA, only qualified contributions and rollovers into the IRA may be used to satisfy the need. Injecting cash into the IRA above those limits constitutes self-dealing, and voids the tax-deferred status of the entire IRA. The resulting tax bill may necessitate the sale of the property to generate cash.
Another potential problem involves ownership of precious metals in IRAs, primarily gold and silver, due to their ready availability. Unfortunately, there are less than scrupulous salespeople everywhere, looking for a “one-up” on the competition. Some of these have adopted the pitch that you, too, can hold the shiny objects in your hand. That part is true until the sales pitch gets extended to the “ Gold IRA at home” fantasy, claiming that you can store your IRA gold in your home. As of this writing, we can find no valid exception to the IRS prohibition against storing precious metals IRA investments at home. In our opinion, based on plentiful research, anyone participating in the “at home” program is flirting with trouble. Learn more at Investopedia.com.
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