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As I understand it, IRS rules allow the purchase of real estate within a self-directed IRA as long as it's for "investment purposes" and not for personal use; i.e., you can't purchase a house that you, your dependents or relatives live in.

Is there a way to purchase property that later could be used as a personal residence? For example, to buy a piece of land that is held for a few years, then used to build a home on? If so, how would that work? Could the trustee be directed to sell the property out of the IRA to the IRA holder, or would the IRS consider that improper?

And lastly, I'm trying to think of a reason why you'd use tax-sheltered money inside an IRA to purchase a building lot in this way... perhaps because that's the only savings a person had available or as a large down payment on a bare lot loan.

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    How is directing the IRA trustee to sell the property (land in this case) to you and only to you not self-dealing which is specifically prohibited for self-directed IRA owners? Aug 28 at 15:09
  • Right. But I’ve read of a strategy of buying the rental within a Roth, and at retirement, “distributing it” back out as a retirement home. A bit different I suppose. Aug 28 at 22:04
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Let us assume that you are allowed to do this.

And lastly, I'm trying to think of a reason why you'd use tax-sheltered money inside an IRA to purchase a building lot in this way... perhaps because that's the only savings a person had available or as a large down payment on a bare lot loan.

You could buy the land today in 2021 for $100,000 with money in the IRA. The IRA then pays any costs associated with the land such as property tax.

Now a few years later the IRA sells the land to you the person for $500,000. Then the new owner builds a house on the land.

Why would somebody do this? They have essentially sent an extra $400,000 into their IRA. It would grow tax deferred from that point. Of course that was post-tax money, so I hope that the IRA was actually a Roth IRA.

In a couple of decades when you sell the house and land, it is likely that the capital gains are lower because the initial cost of the house and land includes the $500,000 purchase price of the land.

This only works if there was no lender involved in the purchase of the vacant land. They would bock the transaction because the land wasn't worth $500,000.

Of course the fact that you were able to set the purchase price that high regardless of the true market value is what makes this self-dealing, and not allowed.

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  • What if the land was worth the $500k due to appreciation during the time the bare land was held? Say there were 3 offers for that amount, is the trustee obligated to accept one of the other offers in an attempt to demonstrate that this was indeed an arm's-length transaction?
    – spuck
    Aug 30 at 14:22
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There does not seem to be much point to this. If the IRA sells the property to the IRA owner, it would have to be at fair market value. This means the IRA owner must accumulate sufficient assets outside the IRA to buy the property. So they could buy it (or a similar property) regardless. The IRA holding it and latter selling it is separable. The IRA should invest in whatever assets will give the best risk-adjusted return. If that happens to be real estate, fine. But there is no particular advantage to investing in something that the IRA owner wants to personally buy later. They can just buy what they want outside the IRA when the time comes.

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  • A possible reason: Say I'm thinking of building a house in the next 5-10 years, and am saving up for the purchase of a lot. Suddenly a lot becomes available that is Too Good to Be True but I need to buy it now or lose the chance. A construction loan is out because I'm not building, lot loans are expensive and need too much down payment, low cash flow, some real-estate seminar told me to buy land in my IRA for huge profits, etc... For whatever reason, the only money I have access to is an IRA. How could it be structured to make it happen while staying within the IRS rules?
    – spuck
    Aug 30 at 14:18

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