One of the most renowned reasons investors turn towards a self directed IRA is its feature that allows the account holder to invest in real estate and profit from its gains tax free or tax differed. This is so advantageous because it allows the investors to truly diversify his or her portfolio by investing in alternative investments. Investing in real estate has many advantageous including rents and property value that will increase with inflation rather than lose value and become worthless with inflation or raising interest rates.
While there are many advantages that people enjoy with the self-directed IRA there are a few things that cannot be completed legally. These are typically referred to as prohibited transactions and usually include any transaction that benefits you or any disqualified person (follow the link for more information on who is a self-directed IRA disqualified person).
The Answer To The Question
So in answer to the original question, “can I live in a property that was purchased with my self directed IRA?” No you cannot live in the property. Under the IRC (Internal Revenue Code) that was set forth by the IRS it is clearly outlined that the owner of the self directed IRA is a disqualified person. Therefore the owner cannot live in the property.
Additionally, if the own of the self-directed IRA has a business that is owned by him or her personally, and the real estate in the IRA LLC needs services that are provided by the business performed it would result in a prohibited transact for that business to engage the IRA’s assets as a client.
The Reasoning
Many have expressed concern with the inability of the IRA owned real estate to be lived in by the account holder, even if the account holder is paying a market rate for rents. The IRA is designed to only benefit the account holder after retirement except in certain circumstances (follow the link for more information on withdrawing fund from an self-directed IRA penalty free). Renting the property would benefit the owner prior to retirement. Additionally, engaging the IRA as a client of a business would also benefit the IRA holder prior to retirement and therefore it is a prohibited transaction.