A friend of mine is a single mom who became a real estate saleswoman several years ago following her divorce. She had a consistent flow of buyers and sellers until the beginning of the year when the market slowdown became even more apparent in many Northwest neighborhoods.

She postponed a long awaited kayak trip because an out-of-state buyer was coming into town with a reported all-cash offer for a waterfront cottage. I laughed and teased her about postponing the trip when I found out the man was single.

“That’s got very little to do with it,” she said. “Gone are the days when you relied on an associate to handle any legitimate customer. This one looks like the first great chance in weeks. He’s buying the place with his IRA to use as a second home.”

I stopped laughing and took a deep breath.

“If he’s going to use his IRA, I hope he plans to rent it out.”

The rules for purchasing real estate with an Individual Retirement Account are specific and differ greatly from those that govern conventional rentals and second homes. For example, you cannot buy a second home with an IRA and use it partly for personal use, even though you might rent it to unrelated persons the rest of the year. And, your IRA cannot purchase a real estate asset and then have a “disqualified” person (family member) use it while it is in the IRA. The purchase must be investment property only.

For investors, the biggest mistake made with an IRA-purchased property is the misapplication of the 14-10 rule. Under current federal tax laws, the owner of a rental vacation home can use it for 14 days or 10 percent of the amount of time the house is rented, whichever is greater, without jeopardizing its status as a rental property and tax shelter. This is not so with a property purchased with an IRA.

Here are the four basic “no-nos” of real estate IRAs:

Personal use (unlike rental property)

Renting IRA property to family, or a partner

Paying yourself with its income

Personally guaranteeing a loan

To prepare for your real estate IRA, designate the amount of your retirement funds that you wish to use in the property deal and open a new IRA account with an independent administrator. The best place to start is an independent community bank. Many banks will not service real estate IRAs (some will say “never heard of it”) because it must act as owner — pay the taxes, collect servicing fees — paperwork that many lenders don’t want or need.

The only exception to IRA funds being used for a personal residence is reserved for first-time homebuyers. A provision in the 1997 Taxpayer Relief Act that allows penalty-free withdrawals of up to $10,000 for the down payment and closing costs. Withdrawals can be made from established IRAs of spouses, parents, children, grandchildren or ancestors as long as they total no more than $10,000. While not subject to the Internal Revenue Service’s 10 percent early withdrawal penalty, normal income taxes will still apply.

Misinformation given by local IRS offices has added to the IRA confusion. According to a federal tax-court case, a couple was charged income tax for withdrawing their IRAs to buy a home even though their local IRS public-assistance representative said the funds would not be taxable.

Emma and James Clarke each withdrew $16,000 from their IRAs. They wanted to be certain the amounts were not taxable because the Clarkes said they would not be able to purchase the house and pay taxes on the $32,000 withdrawal. According to the Clarkes, they were told no penalty would be assessed. The court ruled that when IRS employees give incorrect interpretations of the law, the IRS is not bound by that advice.

In fact, the IRS is not generally bound by the language of its own publications. The court ruled the Clarkes’ withdrawals were taxable under the rules that generally apply to IRA distributions.

Owning a home is a “forced savings plan.” The money that you put in to home ownership is usually returned — with appreciation — when it’s time to sell. Sometimes the appreciation can offset the amount of interest the borrower has paid on the home loan.

If you are a first-time home buyer, however, and using your IRA funds is the only way you can afford the down payment, check with a tax professional before making the move. He might tell you the “R” in IRA is to be used in retirement and not before.

And, he absolutely will tell you that you cannot use your IRA funds to buy a second home.

Tom Kelly’s new book “Cashing In on a Second Home in Mexico: How to Buy, Sell and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com or at www.tomkelly.com.