A Self-Directed IRA lets you invest retirement funds directly into real estate properties like rental homes, commercial buildings, and raw land while enjoying tax advantages. You control the investment decisions, but you must follow strict IRS rules to maintain your account’s tax-advantaged status and avoid severe penalties.
Quick Facts About Self-Directed IRA Real Estate
| Feature | Details |
|---|---|
| Account Types | Traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA, Solo 401(k) |
| Tax Benefits | Tax-deferred growth (Traditional) or tax-free withdrawals (Roth) |
| Property Types | Residential, commercial, raw land, REITs, mortgage notes |
| Minimum Investment | Varies by custodian (typically $1,000-$5,000 to open account) |
| Annual Contribution Limits | $7,000 under age 50; $8,000 age 50+ (2026) |
| Personal Use | Strictly prohibited for you and family members |
| Financing Options | Non-recourse loans only (no personal guarantees) |
What Is a Self-Directed Real Estate IRA?
A Self-Directed Real Estate IRA is a retirement account that allows you to invest in physical properties instead of limiting you to stocks and bonds. The account holder makes all investment decisions while a custodian handles administrative tasks and ensures IRS compliance.
You can use either a Traditional IRA (pre-tax contributions with tax-deferred growth) or a Roth IRA (after-tax contributions with tax-free withdrawals). The account functions like a standard IRA but opens the door to alternative investments that traditional brokerages don’t offer.
Types of Real Estate You Can Buy
Residential Properties
You can purchase single-family homes, duplexes, condominiums, townhomes, and multi-family apartment buildings. All rental income flows back into your IRA, and all property expenses must be paid from IRA funds.
Commercial Properties
Office buildings, retail spaces, warehouses, storage facilities, and industrial properties are allowed investments. Commercial properties often generate higher rental income and provide longer lease terms than residential options.
Raw and Improved Land
Undeveloped land requires minimal maintenance and offers long-term appreciation potential. Improved land with utilities and infrastructure increases development opportunities and property value.
Trust Deeds and Mortgage Notes
Your IRA can act as the lender by providing funds to borrowers with real estate-backed security. Principal and interest payments accrue in your retirement account tax-deferred or tax-free.
Real Estate Investment Trusts (REITs)
Private REITs allow you to invest in large-scale properties without direct management responsibilities. Your IRA owns shares in the trust rather than physical property.
Special Property Types
Storage facilities, mobile home parks, vacation rentals, and even vineyards are permissible investments. These alternative properties can provide steady income streams with relatively low maintenance requirements.
Investment Methods: Four Ways to Purchase Property
| Investment Method | Description | Best For |
|---|---|---|
| Direct Purchase | IRA buys property outright with cash | Investors with sufficient funds in one or multiple IRAs |
| Partnering with Others | Multiple investors pool funds (tenant-in-common) | Buyers needing additional capital; splits income/expenses proportionally |
| Non-Recourse Loans | IRA obtains financing secured only by property | Investors wanting leverage without personal liability |
| Equity-Structured Entities | LLC or Limited Partnership holds property | Multiple investors or checkbook control seekers |
Direct Purchase
This straightforward method works when you have adequate cash in your IRA. You can transfer funds from existing IRAs or roll over 401(k) funds to complete the purchase.
Investing with Others
Your IRA can co-invest with other individuals or their IRAs. Each party owns a proportionate share of the property and receives their percentage of income while paying their share of expenses.
Non-Recourse Loans
These specialized loans are backed exclusively by the property itself, not your personal credit. The lender can only seize the property if you default. Note that leveraged properties may trigger Unrelated Debt Financed Income (UDFI) taxes on the financed portion.
LLC or Partnership Structures
Real estate held through an LLC or Limited Partnership provides checkbook control and flexibility. Your IRA owns membership interest in the entity, which owns the property. Most custodians require multi-member structures rather than single-member LLCs.
Step-by-Step Process to Buy Real Estate
Step 1: Choose Your Self-Directed IRA Custodian
Select a custodian specializing in alternative investments and real estate. Look for companies with strong customer support, transparent fee structures, and experience handling property transactions. Traditional banks and brokerages rarely offer self-directed options.
Step 2: Open Your Account
Complete the custodian’s application process online or with paper forms. Provide identification, proof of income, and other required documentation. Decide whether you want a Traditional IRA (tax-deferred) or Roth IRA (tax-free withdrawals).
Step 3: Fund Your Self-Directed IRA
Transfer funds from existing IRAs, roll over 401(k) or other workplace retirement plans, or make annual contributions up to IRS limits. Transfers and rollovers don’t count toward annual contribution limits.
Step 4: Identify and Research Your Property
You’re responsible for all due diligence, including property inspections, market research, and financial analysis. Consult with real estate agents familiar with IRA purchases and work with professionals who understand self-directed retirement accounts.
Step 5: Make an Offer with Correct Titling
Submit your purchase offer with proper IRA titling from the beginning. The property must be titled in your custodian’s name for your benefit, such as “ABC Trust Company Custodian FBO John Smith IRA.” Never put the property in your personal name.
Step 6: Direct Your Custodian to Purchase
Submit a Buy Direction Letter to your custodian with purchase details, property information, and funding instructions. Your custodian sends funds directly to the closing agent or seller.
Step 7: Maintain Proper Records
Keep all property-related documents, receipts, and correspondence organized. Your custodian handles tax reporting, but you need records for property management and future transactions.
Critical IRS Rules You Must Follow
Property Titling Requirements
All property must be titled in the custodian’s name for the benefit of your IRA. Example: “Madison Trust Company Custodian FBO Sarah Johnson IRA Account #12345.” Never use your personal name on the title or you’ll trigger immediate taxation.
No Personal Use Allowed
You cannot live in, vacation at, or personally use any property your IRA owns. This restriction extends to all disqualified persons including your spouse, children, parents, grandparents, and their spouses. Violating this rule disqualifies your entire IRA.
No Self-Dealing Transactions
Your IRA cannot purchase property you currently own or buy property from disqualified persons. You cannot sell your personal property to your IRA or engage in any transaction providing immediate personal benefit.
No Sweat Equity or Personal Labor
You cannot perform repairs, improvements, or maintenance on IRA-owned property yourself. This includes using your personal tools or equipment. All work must be completed by unrelated third-party contractors paid directly from your IRA.
No Personal Compensation
If you’re a real estate agent, you cannot collect commissions on your IRA’s property transactions. Property managers cannot charge fees for managing their own IRA’s properties. All compensation must be waived or the transaction must involve unrelated parties.
All Expenses Paid from IRA
Property taxes, insurance, repairs, utilities, HOA fees, and all other expenses must be paid using IRA funds. You cannot use personal funds or credit cards for IRA-owned property expenses. Keep sufficient cash reserves in your IRA for ongoing costs.
All Income Returns to IRA
Rental payments, lease income, and property sale proceeds must flow directly to your IRA. Tenants should make checks payable to your custodian FBO your account, not to you personally. Taking constructive receipt of income triggers taxation.
Who Are Disqualified Persons?
The IRS defines disqualified persons as:
- You (the IRA owner)
- Your spouse
- Your children and their spouses
- Your parents and their spouses
- Your grandparents and grandchildren
- Any entity you control with 50% or more ownership
- Fiduciaries, investment advisors, and service providers to your IRA
Tax Considerations for Real Estate IRAs
Tax-Deferred vs. Tax-Free Growth
Traditional IRAs provide tax-deferred growth, meaning you pay taxes when you withdraw funds in retirement. Roth IRAs offer tax-free growth and withdrawals after age 59½ when the account has been open for five years.
Unrelated Business Taxable Income (UBTI)
If your IRA actively operates a business (like flipping houses frequently), it may generate UBTI subject to income tax. Passive rental income typically doesn’t trigger UBTI.
Unrelated Debt Financed Income (UDFI)
When your IRA uses non-recourse financing, the income from the leveraged portion becomes taxable as UDFI. For example, if you finance 50% of a property and earn $10,000 in rental income, $5,000 may be subject to UDFI taxes.
Form 990-T Filing Requirements
Your IRA must file Form 990-T if it generates $1,000 or more in UBTI or UDFI during the tax year. The IRA itself pays the tax, not you personally.
Required Minimum Distributions (RMDs)
Traditional IRAs require annual withdrawals starting at age 73. You’ll need property appraisals to calculate RMDs accurately, which adds ongoing costs. You can satisfy RMDs with cash from other accounts or by distributing property portions.
Checkbook Control: Managing Your Investments
What Is Checkbook Control?
Checkbook control allows you to make investment decisions and transactions without waiting for custodian approval. You establish an LLC or Trust owned by your IRA, then open a checking account for the entity.
Benefits of Checkbook IRAs
You can act quickly on investment opportunities, avoid per-transaction custodian fees, and manage day-to-day property expenses efficiently. This structure works best for rental properties, fix-and-flips, and investments requiring frequent transactions.
How to Set Up Checkbook Control
Work with a company specializing in IRA LLCs to create proper legal structure. Your IRA purchases membership interest in the LLC, which then owns the property. You serve as LLC manager, controlling the checking account while maintaining compliance.
Important Limitations
Even with checkbook control, you must follow all IRS rules regarding prohibited transactions and disqualified persons. The LLC cannot engage in activities that would violate IRA regulations.
Financing Your Real Estate Purchase
Understanding Non-Recourse Loans
Non-recourse loans are secured exclusively by the property with no personal guarantee. If you default, the lender can only seize the collateral property and cannot pursue your other assets or IRA funds.
Finding Non-Recourse Lenders
Traditional banks rarely offer these loans. Work with specialized lenders experienced in self-directed IRA financing. Expect higher interest rates and larger down payments (typically 30-40%) compared to conventional mortgages.
Loan Terms and Requirements
Non-recourse loans usually have shorter terms (15-20 years), higher interest rates, and stricter qualification criteria. The lender evaluates the property’s income potential rather than your personal credit score.
UDFI Tax Implications
Remember that leveraged properties trigger UDFI taxes on the financed income portion. Factor these taxes into your investment calculations when deciding whether to use financing.
Property Management Best Practices
Hiring a Property Manager
While not required, professional property management is highly recommended for rental properties. The manager handles tenant relations, rent collection, and maintenance coordination, ensuring all funds flow properly to your IRA.
Rent Collection Procedures
Tenants must make payments directly to your IRA custodian or LLC (if using checkbook control). Never accept rent checks made out to you personally, even temporarily, as this constitutes prohibited constructive receipt.
Maintenance and Repairs
Schedule regular property inspections and address maintenance issues promptly. All contractors must invoice your IRA directly and receive payment from IRA funds. Keep detailed records of all work performed and expenses paid.
Insurance Requirements
Maintain adequate property insurance, liability coverage, and landlord policies. Ensure all policies list your IRA custodian or LLC as the insured party, not your personal name.
Choosing the Right Self-Directed IRA Custodian
Key Selection Criteria
Look for custodians with extensive real estate experience, transparent fee structures, responsive customer service, and strong regulatory compliance history. Check their state banking department oversight and industry reputation.
Questions to Ask Potential Custodians
- What types of real estate do you allow?
- What are your transaction fees, annual fees, and additional charges?
- How long do property purchase transactions typically take?
- Do you provide guidance on prohibited transactions?
- What happens if my property needs emergency repairs?
- Can you accommodate non-recourse financing?
Understanding Fee Structures
Custodians charge various fees including account setup, annual maintenance, transaction fees, and asset-based fees. Some use flat-rate pricing while others charge based on account value. Calculate total costs for your expected activity level.
Customer Support Quality
You’ll need accessible, knowledgeable support throughout your investment journey. Test responsiveness by asking questions during your research phase and reading customer reviews from other real estate investors.
Benefits of Real Estate in Your IRA
Tax Advantages
All rental income, capital gains, and property appreciation grow tax-deferred or tax-free within your IRA. You don’t pay annual income taxes on rental profits or capital gains taxes when selling properties.
Portfolio Diversification
Real estate provides tangible assets uncorrelated with stock market performance. Property investments can balance market volatility and provide stability during economic downturns.
Inflation Protection
Real estate typically appreciates over time and rents increase with inflation. Physical properties maintain intrinsic value even during economic uncertainty, protecting your purchasing power.
Passive Income Generation
Rental properties create steady cash flow that accumulates in your IRA. This income can fund additional investments or build reserves for property expenses and future opportunities.
Long-Term Appreciation Potential
Property values historically increase over extended periods, building substantial wealth for retirement. Strategic location selection and property improvements can accelerate appreciation.
Common Mistakes to Avoid
Using Property Before Retirement
Never stay in vacation rentals, store personal items in storage facilities, or conduct business from IRA-owned commercial space. Any personal use disqualifies your IRA immediately.
Insufficient Cash Reserves
Maintain adequate liquidity in your IRA for unexpected repairs, vacancies, and ongoing expenses. Running out of cash can force prohibited transactions or property distress.
Improper Titling
Double-check all documents before signing. Incorrect titling delays transactions and may create compliance issues. Always use your custodian’s exact required format.
Mixing Personal and IRA Funds
Never combine personal money with IRA funds for property purchases or expenses. Keep all transactions completely separate and properly documented.
Inadequate Due Diligence
Research properties thoroughly including inspections, title searches, environmental assessments, and market analysis. Your custodian doesn’t vet investments for quality or suitability.
Ignoring Professional Advice
Consult with tax advisors, real estate attorneys, and financial planners familiar with self-directed IRAs. Professional guidance helps you avoid costly mistakes and optimize your strategy.
Real-World Investment Scenarios
Scenario 1: Rental Property Investment
You have $150,000 in your Traditional IRA from a 401(k) rollover. You purchase a single-family rental home for $140,000 (keeping $10,000 for reserves and closing costs). The property generates $1,200 monthly rent ($14,400 annually). After expenses, you net $8,000 annually, which grows tax-deferred in your IRA.
Scenario 2: Partner Investment
You and two friends each have $100,000 in your IRAs. Together, you purchase a $300,000 duplex, with each IRA owning 33.3%. Rental income and expenses are split proportionally, and each IRA receives one-third of profits or appreciation at sale.
Scenario 3: Leveraged Purchase
Your Roth IRA has $75,000. You use this as a 30% down payment on a $250,000 commercial property with a non-recourse loan covering the remaining $175,000. The property generates $24,000 annual income, with 70% (the leveraged portion) potentially subject to UDFI taxes.
Scenario 4: Private Lending
You use your $200,000 IRA to provide a hard money loan to a house flipper. The borrower pays 10% interest ($20,000 annually) secured by the property. Your IRA receives tax-advantaged interest income without property management responsibilities.
Prohibited Transaction Examples
What Happens If You Violate Rules
The IRS treats your entire IRA as distributed immediately upon a prohibited transaction. You owe income taxes on the full account value, plus a 10% early withdrawal penalty if under age 59½, plus potential 20% accuracy-related penalties.
Common Violations
- Buying property from your father and renting it to your son
- Using your tools to repair an IRA-owned rental
- Staying at your IRA’s vacation rental during personal trips
- Paying property expenses with your credit card
- Collecting real estate commissions on IRA transactions
- Selling personal property to your IRA at inflated prices
How to Stay Compliant
Before any transaction, ask: “Does this provide me or a disqualified person immediate benefit?” If yes, don’t proceed. Consult legal counsel when uncertain about transaction permissibility.
Exit Strategies and Distributions
Selling IRA-Owned Property
When you sell property, all proceeds return to your IRA tax-free (Roth) or tax-deferred (Traditional). You can reinvest in other properties, diversify into different assets, or hold cash for future opportunities.
Taking Distributions
You can begin penalty-free withdrawals from Traditional IRAs at age 59½. Roth IRAs allow tax-free withdrawals at 59½ if the account has been open five years. Earlier withdrawals incur 10% penalties plus income taxes.
In-Kind Property Distributions
You can transfer property ownership from your IRA to your personal name as a distribution. The property’s appraised value counts as your distribution amount, subject to applicable taxes and penalties.
Required Minimum Distributions
Traditional IRAs require annual RMDs starting at age 73. Have properties professionally appraised each year to calculate correct distribution amounts. You can satisfy RMDs with cash from other sources or by distributing property.
Frequently Asked Questions
Can I live in a property my Self-Directed IRA owns?
No. IRS rules strictly prohibit you and all disqualified persons (spouse, children, parents, grandparents) from personally using IRA-owned property at any time. This includes living in homes, vacationing at rentals, or using commercial space for business. Violating this rule disqualifies your entire IRA, triggering immediate taxes and penalties.
How do I handle property repairs if I can’t do the work myself?
All repairs must be performed by unrelated third-party contractors who invoice your IRA directly. You can research contractors, get estimates, and coordinate work (desk work), but you cannot perform physical labor, use your tools, or provide sweat equity. Payment comes exclusively from your IRA funds.
Can my IRA partner with my personal funds to buy property?
Yes. Your IRA can co-invest with your personal money or with disqualified persons for new purchases. Each party owns a proportionate share. However, your IRA cannot buy property from you or sell property to you. The partnership must involve acquiring new assets from third parties.
What happens if I accidentally violate a rule?
The IRS treats the entire IRA as distributed immediately, subjecting the full account value to income taxes. If you’re under 59½, you also owe a 10% early withdrawal penalty. Additional accuracy-related penalties of 20% may apply. There’s no fixing prohibited transactions retroactively.
Can I use a Self-Directed Roth IRA for real estate?
Yes. Roth IRAs follow the same rules as Traditional IRAs for real estate investing. The advantage is that all rental income and property appreciation grow completely tax-free, and you take tax-free withdrawals in retirement after age 59½ (with a five-year account seasoning period).
Meta Title: How to Buy Real Estate with Self-Directed IRA: Complete Legal Guide
Meta Description: Learn the step-by-step process to buy real estate using a Self-Directed IRA. Discover tax benefits, IRS rules, property types, and strategies to grow your retirement wealth.
Slug: how-to-buy-real-estate-self-directed-ira-legal-guideHow to Buy Real Estate with a Self-Directed IRA: Complete Legal Guide
A Self-Directed IRA lets you invest retirement funds directly into real estate properties like rental homes, commercial buildings, and raw land while enjoying tax advantages. You control the investment decisions, but you must follow strict IRS rules to maintain your account’s tax-advantaged status and avoid severe penalties.
Quick Facts About Self-Directed IRA Real Estate
| Feature | Details |
|---|---|
| Account Types | Traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA, Solo 401(k) |
| Tax Benefits | Tax-deferred growth (Traditional) or tax-free withdrawals (Roth) |
| Property Types | Residential, commercial, raw land, REITs, mortgage notes |
| Minimum Investment | Varies by custodian (typically $1,000-$5,000 to open account) |
| Annual Contribution Limits | $7,000 under age 50; $8,000 age 50+ (2026) |
| Personal Use | Strictly prohibited for you and family members |
| Financing Options | Non-recourse loans only (no personal guarantees) |
What Is a Self-Directed Real Estate IRA?
A Self-Directed Real Estate IRA is a retirement account that allows you to invest in physical properties instead of limiting you to stocks and bonds. The account holder makes all investment decisions while a custodian handles administrative tasks and ensures IRS compliance.
You can use either a Traditional IRA (pre-tax contributions with tax-deferred growth) or a Roth IRA (after-tax contributions with tax-free withdrawals). The account functions like a standard IRA but opens the door to alternative investments that traditional brokerages don’t offer.
Types of Real Estate You Can Buy
Residential Properties
You can purchase single-family homes, duplexes, condominiums, townhomes, and multi-family apartment buildings. All rental income flows back into your IRA, and all property expenses must be paid from IRA funds.
Commercial Properties
Office buildings, retail spaces, warehouses, storage facilities, and industrial properties are allowed investments. Commercial properties often generate higher rental income and provide longer lease terms than residential options.
Raw and Improved Land
Undeveloped land requires minimal maintenance and offers long-term appreciation potential. Improved land with utilities and infrastructure increases development opportunities and property value.
Trust Deeds and Mortgage Notes
Your IRA can act as the lender by providing funds to borrowers with real estate-backed security. Principal and interest payments accrue in your retirement account tax-deferred or tax-free.
Real Estate Investment Trusts (REITs)
Private REITs allow you to invest in large-scale properties without direct management responsibilities. Your IRA owns shares in the trust rather than physical property.
Special Property Types
Storage facilities, mobile home parks, vacation rentals, and even vineyards are permissible investments. These alternative properties can provide steady income streams with relatively low maintenance requirements.
Investment Methods: Four Ways to Purchase Property
| Investment Method | Description | Best For |
|---|---|---|
| Direct Purchase | IRA buys property outright with cash | Investors with sufficient funds in one or multiple IRAs |
| Partnering with Others | Multiple investors pool funds (tenant-in-common) | Buyers needing additional capital; splits income/expenses proportionally |
| Non-Recourse Loans | IRA obtains financing secured only by property | Investors wanting leverage without personal liability |
| Equity-Structured Entities | LLC or Limited Partnership holds property | Multiple investors or checkbook control seekers |
Direct Purchase
This straightforward method works when you have adequate cash in your IRA. You can transfer funds from existing IRAs or roll over 401(k) funds to complete the purchase.
Investing with Others
Your IRA can co-invest with other individuals or their IRAs. Each party owns a proportionate share of the property and receives their percentage of income while paying their share of expenses.
Non-Recourse Loans
These specialized loans are backed exclusively by the property itself, not your personal credit. The lender can only seize the property if you default. Note that leveraged properties may trigger Unrelated Debt Financed Income (UDFI) taxes on the financed portion.
LLC or Partnership Structures
Real estate held through an LLC or Limited Partnership provides checkbook control and flexibility. Your IRA owns membership interest in the entity, which owns the property. Most custodians require multi-member structures rather than single-member LLCs.
Step-by-Step Process to Buy Real Estate
Step 1: Choose Your Self-Directed IRA Custodian
Select a custodian specializing in alternative investments and real estate. Look for companies with strong customer support, transparent fee structures, and experience handling property transactions. Traditional banks and brokerages rarely offer self-directed options.
Step 2: Open Your Account
Complete the custodian’s application process online or with paper forms. Provide identification, proof of income, and other required documentation. Decide whether you want a Traditional IRA (tax-deferred) or Roth IRA (tax-free withdrawals).
Step 3: Fund Your Self-Directed IRA
Transfer funds from existing IRAs, roll over 401(k) or other workplace retirement plans, or make annual contributions up to IRS limits. Transfers and rollovers don’t count toward annual contribution limits.
Step 4: Identify and Research Your Property
You’re responsible for all due diligence, including property inspections, market research, and financial analysis. Consult with real estate agents familiar with IRA purchases and work with professionals who understand self-directed retirement accounts.
Step 5: Make an Offer with Correct Titling
Submit your purchase offer with proper IRA titling from the beginning. The property must be titled in your custodian’s name for your benefit, such as “ABC Trust Company Custodian FBO John Smith IRA.” Never put the property in your personal name.
Step 6: Direct Your Custodian to Purchase
Submit a Buy Direction Letter to your custodian with purchase details, property information, and funding instructions. Your custodian sends funds directly to the closing agent or seller.
Step 7: Maintain Proper Records
Keep all property-related documents, receipts, and correspondence organized. Your custodian handles tax reporting, but you need records for property management and future transactions.
Critical IRS Rules You Must Follow
Property Titling Requirements
All property must be titled in the custodian’s name for the benefit of your IRA. Example: “Madison Trust Company Custodian FBO Sarah Johnson IRA Account #12345.” Never use your personal name on the title or you’ll trigger immediate taxation.
No Personal Use Allowed
You cannot live in, vacation at, or personally use any property your IRA owns. This restriction extends to all disqualified persons including your spouse, children, parents, grandparents, and their spouses. Violating this rule disqualifies your entire IRA.
No Self-Dealing Transactions
Your IRA cannot purchase property you currently own or buy property from disqualified persons. You cannot sell your personal property to your IRA or engage in any transaction providing immediate personal benefit.
No Sweat Equity or Personal Labor
You cannot perform repairs, improvements, or maintenance on IRA-owned property yourself. This includes using your personal tools or equipment. All work must be completed by unrelated third-party contractors paid directly from your IRA.
No Personal Compensation
If you’re a real estate agent, you cannot collect commissions on your IRA’s property transactions. Property managers cannot charge fees for managing their own IRA’s properties. All compensation must be waived or the transaction must involve unrelated parties.
All Expenses Paid from IRA
Property taxes, insurance, repairs, utilities, HOA fees, and all other expenses must be paid using IRA funds. You cannot use personal funds or credit cards for IRA-owned property expenses. Keep sufficient cash reserves in your IRA for ongoing costs.
All Income Returns to IRA
Rental payments, lease income, and property sale proceeds must flow directly to your IRA. Tenants should make checks payable to your custodian FBO your account, not to you personally. Taking constructive receipt of income triggers taxation.
Who Are Disqualified Persons?
The IRS defines disqualified persons as:
- You (the IRA owner)
- Your spouse
- Your children and their spouses
- Your parents and their spouses
- Your grandparents and grandchildren
- Any entity you control with 50% or more ownership
- Fiduciaries, investment advisors, and service providers to your IRA
Tax Considerations for Real Estate IRAs
Tax-Deferred vs. Tax-Free Growth
Traditional IRAs provide tax-deferred growth, meaning you pay taxes when you withdraw funds in retirement. Roth IRAs offer tax-free growth and withdrawals after age 59½ when the account has been open for five years.
Unrelated Business Taxable Income (UBTI)
If your IRA actively operates a business (like flipping houses frequently), it may generate UBTI subject to income tax. Passive rental income typically doesn’t trigger UBTI.
Unrelated Debt Financed Income (UDFI)
When your IRA uses non-recourse financing, the income from the leveraged portion becomes taxable as UDFI. For example, if you finance 50% of a property and earn $10,000 in rental income, $5,000 may be subject to UDFI taxes.
Form 990-T Filing Requirements
Your IRA must file Form 990-T if it generates $1,000 or more in UBTI or UDFI during the tax year. The IRA itself pays the tax, not you personally.
Required Minimum Distributions (RMDs)
Traditional IRAs require annual withdrawals starting at age 73. You’ll need property appraisals to calculate RMDs accurately, which adds ongoing costs. You can satisfy RMDs with cash from other accounts or by distributing property portions.
Checkbook Control: Managing Your Investments
What Is Checkbook Control?
Checkbook control allows you to make investment decisions and transactions without waiting for custodian approval. You establish an LLC or Trust owned by your IRA, then open a checking account for the entity.
Benefits of Checkbook IRAs
You can act quickly on investment opportunities, avoid per-transaction custodian fees, and manage day-to-day property expenses efficiently. This structure works best for rental properties, fix-and-flips, and investments requiring frequent transactions.
How to Set Up Checkbook Control
Work with a company specializing in IRA LLCs to create proper legal structure. Your IRA purchases membership interest in the LLC, which then owns the property. You serve as LLC manager, controlling the checking account while maintaining compliance.
Important Limitations
Even with checkbook control, you must follow all IRS rules regarding prohibited transactions and disqualified persons. The LLC cannot engage in activities that would violate IRA regulations.
Financing Your Real Estate Purchase
Understanding Non-Recourse Loans
Non-recourse loans are secured exclusively by the property with no personal guarantee. If you default, the lender can only seize the collateral property and cannot pursue your other assets or IRA funds.
Finding Non-Recourse Lenders
Traditional banks rarely offer these loans. Work with specialized lenders experienced in self-directed IRA financing. Expect higher interest rates and larger down payments (typically 30-40%) compared to conventional mortgages.
Loan Terms and Requirements
Non-recourse loans usually have shorter terms (15-20 years), higher interest rates, and stricter qualification criteria. The lender evaluates the property’s income potential rather than your personal credit score.
UDFI Tax Implications
Remember that leveraged properties trigger UDFI taxes on the financed income portion. Factor these taxes into your investment calculations when deciding whether to use financing.
Property Management Best Practices
Hiring a Property Manager
While not required, professional property management is highly recommended for rental properties. The manager handles tenant relations, rent collection, and maintenance coordination, ensuring all funds flow properly to your IRA.
Rent Collection Procedures
Tenants must make payments directly to your IRA custodian or LLC (if using checkbook control). Never accept rent checks made out to you personally, even temporarily, as this constitutes prohibited constructive receipt.
Maintenance and Repairs
Schedule regular property inspections and address maintenance issues promptly. All contractors must invoice your IRA directly and receive payment from IRA funds. Keep detailed records of all work performed and expenses paid.
Insurance Requirements
Maintain adequate property insurance, liability coverage, and landlord policies. Ensure all policies list your IRA custodian or LLC as the insured party, not your personal name.
Choosing the Right Self-Directed IRA Custodian
Key Selection Criteria
Look for custodians with extensive real estate experience, transparent fee structures, responsive customer service, and strong regulatory compliance history. Check their state banking department oversight and industry reputation.
Questions to Ask Potential Custodians
- What types of real estate do you allow?
- What are your transaction fees, annual fees, and additional charges?
- How long do property purchase transactions typically take?
- Do you provide guidance on prohibited transactions?
- What happens if my property needs emergency repairs?
- Can you accommodate non-recourse financing?
Understanding Fee Structures
Custodians charge various fees including account setup, annual maintenance, transaction fees, and asset-based fees. Some use flat-rate pricing while others charge based on account value. Calculate total costs for your expected activity level.
Customer Support Quality
You’ll need accessible, knowledgeable support throughout your investment journey. Test responsiveness by asking questions during your research phase and reading customer reviews from other real estate investors.
Benefits of Real Estate in Your IRA
Tax Advantages
All rental income, capital gains, and property appreciation grow tax-deferred or tax-free within your IRA. You don’t pay annual income taxes on rental profits or capital gains taxes when selling properties.
Portfolio Diversification
Real estate provides tangible assets uncorrelated with stock market performance. Property investments can balance market volatility and provide stability during economic downturns.
Inflation Protection
Real estate typically appreciates over time and rents increase with inflation. Physical properties maintain intrinsic value even during economic uncertainty, protecting your purchasing power.
Passive Income Generation
Rental properties create steady cash flow that accumulates in your IRA. This income can fund additional investments or build reserves for property expenses and future opportunities.
Long-Term Appreciation Potential
Property values historically increase over extended periods, building substantial wealth for retirement. Strategic location selection and property improvements can accelerate appreciation.
Common Mistakes to Avoid
Using Property Before Retirement
Never stay in vacation rentals, store personal items in storage facilities, or conduct business from IRA-owned commercial space. Any personal use disqualifies your IRA immediately.
Insufficient Cash Reserves
Maintain adequate liquidity in your IRA for unexpected repairs, vacancies, and ongoing expenses. Running out of cash can force prohibited transactions or property distress.
Improper Titling
Double-check all documents before signing. Incorrect titling delays transactions and may create compliance issues. Always use your custodian’s exact required format.
Mixing Personal and IRA Funds
Never combine personal money with IRA funds for property purchases or expenses. Keep all transactions completely separate and properly documented.
Inadequate Due Diligence
Research properties thoroughly including inspections, title searches, environmental assessments, and market analysis. Your custodian doesn’t vet investments for quality or suitability.
Ignoring Professional Advice
Consult with tax advisors, real estate attorneys, and financial planners familiar with self-directed IRAs. Professional guidance helps you avoid costly mistakes and optimize your strategy.
Real-World Investment Scenarios
Scenario 1: Rental Property Investment
You have $150,000 in your Traditional IRA from a 401(k) rollover. You purchase a single-family rental home for $140,000 (keeping $10,000 for reserves and closing costs). The property generates $1,200 monthly rent ($14,400 annually). After expenses, you net $8,000 annually, which grows tax-deferred in your IRA.
Scenario 2: Partner Investment
You and two friends each have $100,000 in your IRAs. Together, you purchase a $300,000 duplex, with each IRA owning 33.3%. Rental income and expenses are split proportionally, and each IRA receives one-third of profits or appreciation at sale.
Scenario 3: Leveraged Purchase
Your Roth IRA has $75,000. You use this as a 30% down payment on a $250,000 commercial property with a non-recourse loan covering the remaining $175,000. The property generates $24,000 annual income, with 70% (the leveraged portion) potentially subject to UDFI taxes.
Scenario 4: Private Lending
You use your $200,000 IRA to provide a hard money loan to a house flipper. The borrower pays 10% interest ($20,000 annually) secured by the property. Your IRA receives tax-advantaged interest income without property management responsibilities.
Prohibited Transaction Examples
What Happens If You Violate Rules
The IRS treats your entire IRA as distributed immediately upon a prohibited transaction. You owe income taxes on the full account value, plus a 10% early withdrawal penalty if under age 59½, plus potential 20% accuracy-related penalties.
Common Violations
- Buying property from your father and renting it to your son
- Using your tools to repair an IRA-owned rental
- Staying at your IRA’s vacation rental during personal trips
- Paying property expenses with your credit card
- Collecting real estate commissions on IRA transactions
- Selling personal property to your IRA at inflated prices
How to Stay Compliant
Before any transaction, ask: “Does this provide me or a disqualified person immediate benefit?” If yes, don’t proceed. Consult legal counsel when uncertain about transaction permissibility.
Exit Strategies and Distributions
Selling IRA-Owned Property
When you sell property, all proceeds return to your IRA tax-free (Roth) or tax-deferred (Traditional). You can reinvest in other properties, diversify into different assets, or hold cash for future opportunities.
Taking Distributions
You can begin penalty-free withdrawals from Traditional IRAs at age 59½. Roth IRAs allow tax-free withdrawals at 59½ if the account has been open five years. Earlier withdrawals incur 10% penalties plus income taxes.
In-Kind Property Distributions
You can transfer property ownership from your IRA to your personal name as a distribution. The property’s appraised value counts as your distribution amount, subject to applicable taxes and penalties.
Required Minimum Distributions
Traditional IRAs require annual RMDs starting at age 73. Have properties professionally appraised each year to calculate correct distribution amounts. You can satisfy RMDs with cash from other sources or by distributing property.
Frequently Asked Questions
Can I live in a property my Self-Directed IRA owns?
No. IRS rules strictly prohibit you and all disqualified persons (spouse, children, parents, grandparents) from personally using IRA-owned property at any time. This includes living in homes, vacationing at rentals, or using commercial space for business. Violating this rule disqualifies your entire IRA, triggering immediate taxes and penalties.
How do I handle property repairs if I can’t do the work myself?
All repairs must be performed by unrelated third-party contractors who invoice your IRA directly. You can research contractors, get estimates, and coordinate work (desk work), but you cannot perform physical labor, use your tools, or provide sweat equity. Payment comes exclusively from your IRA funds.
Can my IRA partner with my personal funds to buy property?
Yes. Your IRA can co-invest with your personal money or with disqualified persons for new purchases. Each party owns a proportionate share. However, your IRA cannot buy property from you or sell property to you. The partnership must involve acquiring new assets from third parties.
What happens if I accidentally violate a rule?
The IRS treats the entire IRA as distributed immediately, subjecting the full account value to income taxes. If you’re under 59½, you also owe a 10% early withdrawal penalty. Additional accuracy-related penalties of 20% may apply. There’s no fixing prohibited transactions retroactively.
Can I use a Self-Directed Roth IRA for real estate?
Yes. Roth IRAs follow the same rules as Traditional IRAs for real estate investing. The advantage is that all rental income and property appreciation grow completely tax-free, and you take tax-free withdrawals in retirement after age 59½ (with a five-year account seasoning period).
Meta Title: How to Buy Real Estate with Self-Directed IRA: Complete Legal Guide
Meta Description: Learn the step-by-step process to buy real estate using a Self-Directed IRA. Discover tax benefits, IRS rules, property types, and strategies to grow your retirement wealth.
Slug: how-to-buy-real-estate-self-directed-ira-legal-guideHow to Buy Real Estate with a Self-Directed IRA: Complete Legal Guide
A Self-Directed IRA lets you invest retirement funds directly into real estate properties like rental homes, commercial buildings, and raw land while enjoying tax advantages. You control the investment decisions, but you must follow strict IRS rules to maintain your account’s tax-advantaged status and avoid severe penalties.
Quick Facts About Self-Directed IRA Real Estate
| Feature | Details |
|---|---|
| Account Types | Traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA, Solo 401(k) |
| Tax Benefits | Tax-deferred growth (Traditional) or tax-free withdrawals (Roth) |
| Property Types | Residential, commercial, raw land, REITs, mortgage notes |
| Minimum Investment | Varies by custodian (typically $1,000-$5,000 to open account) |
| Annual Contribution Limits | $7,000 under age 50; $8,000 age 50+ (2026) |
| Personal Use | Strictly prohibited for you and family members |
| Financing Options | Non-recourse loans only (no personal guarantees) |
What Is a Self-Directed Real Estate IRA?
A Self-Directed Real Estate IRA is a retirement account that allows you to invest in physical properties instead of limiting you to stocks and bonds. The account holder makes all investment decisions while a custodian handles administrative tasks and ensures IRS compliance.
You can use either a Traditional IRA (pre-tax contributions with tax-deferred growth) or a Roth IRA (after-tax contributions with tax-free withdrawals). The account functions like a standard IRA but opens the door to alternative investments that traditional brokerages don’t offer.
Types of Real Estate You Can Buy
Residential Properties
You can purchase single-family homes, duplexes, condominiums, townhomes, and multi-family apartment buildings. All rental income flows back into your IRA, and all property expenses must be paid from IRA funds.
Commercial Properties
Office buildings, retail spaces, warehouses, storage facilities, and industrial properties are allowed investments. Commercial properties often generate higher rental income and provide longer lease terms than residential options.
Raw and Improved Land
Undeveloped land requires minimal maintenance and offers long-term appreciation potential. Improved land with utilities and infrastructure increases development opportunities and property value.
Trust Deeds and Mortgage Notes
Your IRA can act as the lender by providing funds to borrowers with real estate-backed security. Principal and interest payments accrue in your retirement account tax-deferred or tax-free.
Real Estate Investment Trusts (REITs)
Private REITs allow you to invest in large-scale properties without direct management responsibilities. Your IRA owns shares in the trust rather than physical property.
Special Property Types
Storage facilities, mobile home parks, vacation rentals, and even vineyards are permissible investments. These alternative properties can provide steady income streams with relatively low maintenance requirements.
People also love to read this: SBA 7(a) Loan vs SBA 504 Loan Comparison
Investment Methods: Four Ways to Purchase Property
| Investment Method | Description | Best For |
|---|---|---|
| Direct Purchase | IRA buys property outright with cash | Investors with sufficient funds in one or multiple IRAs |
| Partnering with Others | Multiple investors pool funds (tenant-in-common) | Buyers needing additional capital; splits income/expenses proportionally |
| Non-Recourse Loans | IRA obtains financing secured only by property | Investors wanting leverage without personal liability |
| Equity-Structured Entities | LLC or Limited Partnership holds property | Multiple investors or checkbook control seekers |
Direct Purchase
This straightforward method works when you have adequate cash in your IRA. You can transfer funds from existing IRAs or roll over 401(k) funds to complete the purchase.
Investing with Others
Your IRA can co-invest with other individuals or their IRAs. Each party owns a proportionate share of the property and receives their percentage of income while paying their share of expenses.
Non-Recourse Loans
These specialized loans are backed exclusively by the property itself, not your personal credit. The lender can only seize the property if you default. Note that leveraged properties may trigger Unrelated Debt Financed Income (UDFI) taxes on the financed portion.
LLC or Partnership Structures
Real estate held through an LLC or Limited Partnership provides checkbook control and flexibility. Your IRA owns membership interest in the entity, which owns the property. Most custodians require multi-member structures rather than single-member LLCs.
Step-by-Step Process to Buy Real Estate
Step 1: Choose Your Self-Directed IRA Custodian
Select a custodian specializing in alternative investments and real estate. Look for companies with strong customer support, transparent fee structures, and experience handling property transactions. Traditional banks and brokerages rarely offer self-directed options.
Step 2: Open Your Account
Complete the custodian’s application process online or with paper forms. Provide identification, proof of income, and other required documentation. Decide whether you want a Traditional IRA (tax-deferred) or Roth IRA (tax-free withdrawals).
Step 3: Fund Your Self-Directed IRA
Transfer funds from existing IRAs, roll over 401(k) or other workplace retirement plans, or make annual contributions up to IRS limits. Transfers and rollovers don’t count toward annual contribution limits.
Step 4: Identify and Research Your Property
You’re responsible for all due diligence, including property inspections, market research, and financial analysis. Consult with real estate agents familiar with IRA purchases and work with professionals who understand self-directed retirement accounts.
Step 5: Make an Offer with Correct Titling
Submit your purchase offer with proper IRA titling from the beginning. The property must be titled in your custodian’s name for your benefit, such as “ABC Trust Company Custodian FBO John Smith IRA.” Never put the property in your personal name.
Step 6: Direct Your Custodian to Purchase
Submit a Buy Direction Letter to your custodian with purchase details, property information, and funding instructions. Your custodian sends funds directly to the closing agent or seller.
Step 7: Maintain Proper Records
Keep all property-related documents, receipts, and correspondence organized. Your custodian handles tax reporting, but you need records for property management and future transactions.
Critical IRS Rules You Must Follow
Property Titling Requirements
All property must be titled in the custodian’s name for the benefit of your IRA. Example: “Madison Trust Company Custodian FBO Sarah Johnson IRA Account #12345.” Never use your personal name on the title or you’ll trigger immediate taxation.
No Personal Use Allowed
You cannot live in, vacation at, or personally use any property your IRA owns. This restriction extends to all disqualified persons including your spouse, children, parents, grandparents, and their spouses. Violating this rule disqualifies your entire IRA.
No Self-Dealing Transactions
Your IRA cannot purchase property you currently own or buy property from disqualified persons. You cannot sell your personal property to your IRA or engage in any transaction providing immediate personal benefit.
No Sweat Equity or Personal Labor
You cannot perform repairs, improvements, or maintenance on IRA-owned property yourself. This includes using your personal tools or equipment. All work must be completed by unrelated third-party contractors paid directly from your IRA.
No Personal Compensation
If you’re a real estate agent, you cannot collect commissions on your IRA’s property transactions. Property managers cannot charge fees for managing their own IRA’s properties. All compensation must be waived or the transaction must involve unrelated parties.
All Expenses Paid from IRA
Property taxes, insurance, repairs, utilities, HOA fees, and all other expenses must be paid using IRA funds. You cannot use personal funds or credit cards for IRA-owned property expenses. Keep sufficient cash reserves in your IRA for ongoing costs.
All Income Returns to IRA
Rental payments, lease income, and property sale proceeds must flow directly to your IRA. Tenants should make checks payable to your custodian FBO your account, not to you personally. Taking constructive receipt of income triggers taxation.
Who Are Disqualified Persons?
The IRS defines disqualified persons as:
- You (the IRA owner)
- Your spouse
- Your children and their spouses
- Your parents and their spouses
- Your grandparents and grandchildren
- Any entity you control with 50% or more ownership
- Fiduciaries, investment advisors, and service providers to your IRA
Tax Considerations for Real Estate IRAs
Tax-Deferred vs. Tax-Free Growth
Traditional IRAs provide tax-deferred growth, meaning you pay taxes when you withdraw funds in retirement. Roth IRAs offer tax-free growth and withdrawals after age 59½ when the account has been open for five years.
Unrelated Business Taxable Income (UBTI)
If your IRA actively operates a business (like flipping houses frequently), it may generate UBTI subject to income tax. Passive rental income typically doesn’t trigger UBTI.
Unrelated Debt Financed Income (UDFI)
When your IRA uses non-recourse financing, the income from the leveraged portion becomes taxable as UDFI. For example, if you finance 50% of a property and earn $10,000 in rental income, $5,000 may be subject to UDFI taxes.
Form 990-T Filing Requirements
Your IRA must file Form 990-T if it generates $1,000 or more in UBTI or UDFI during the tax year. The IRA itself pays the tax, not you personally.
Required Minimum Distributions (RMDs)
Traditional IRAs require annual withdrawals starting at age 73. You’ll need property appraisals to calculate RMDs accurately, which adds ongoing costs. You can satisfy RMDs with cash from other accounts or by distributing property portions.
Checkbook Control: Managing Your Investments
What Is Checkbook Control?
Checkbook control allows you to make investment decisions and transactions without waiting for custodian approval. You establish an LLC or Trust owned by your IRA, then open a checking account for the entity.
Benefits of Checkbook IRAs
You can act quickly on investment opportunities, avoid per-transaction custodian fees, and manage day-to-day property expenses efficiently. This structure works best for rental properties, fix-and-flips, and investments requiring frequent transactions.
How to Set Up Checkbook Control
Work with a company specializing in IRA LLCs to create proper legal structure. Your IRA purchases membership interest in the LLC, which then owns the property. You serve as LLC manager, controlling the checking account while maintaining compliance.
Important Limitations
Even with checkbook control, you must follow all IRS rules regarding prohibited transactions and disqualified persons. The LLC cannot engage in activities that would violate IRA regulations.
Financing Your Real Estate Purchase
Understanding Non-Recourse Loans
Non-recourse loans are secured exclusively by the property with no personal guarantee. If you default, the lender can only seize the collateral property and cannot pursue your other assets or IRA funds.
Finding Non-Recourse Lenders
Traditional banks rarely offer these loans. Work with specialized lenders experienced in self-directed IRA financing. Expect higher interest rates and larger down payments (typically 30-40%) compared to conventional mortgages.
Loan Terms and Requirements
Non-recourse loans usually have shorter terms (15-20 years), higher interest rates, and stricter qualification criteria. The lender evaluates the property’s income potential rather than your personal credit score.
UDFI Tax Implications
Remember that leveraged properties trigger UDFI taxes on the financed income portion. Factor these taxes into your investment calculations when deciding whether to use financing.
Property Management Best Practices
Hiring a Property Manager
While not required, professional property management is highly recommended for rental properties. The manager handles tenant relations, rent collection, and maintenance coordination, ensuring all funds flow properly to your IRA.
Rent Collection Procedures
Tenants must make payments directly to your IRA custodian or LLC (if using checkbook control). Never accept rent checks made out to you personally, even temporarily, as this constitutes prohibited constructive receipt.
Maintenance and Repairs
Schedule regular property inspections and address maintenance issues promptly. All contractors must invoice your IRA directly and receive payment from IRA funds. Keep detailed records of all work performed and expenses paid.
Insurance Requirements
Maintain adequate property insurance, liability coverage, and landlord policies. Ensure all policies list your IRA custodian or LLC as the insured party, not your personal name.
Choosing the Right Self-Directed IRA Custodian
Key Selection Criteria
Look for custodians with extensive real estate experience, transparent fee structures, responsive customer service, and strong regulatory compliance history. Check their state banking department oversight and industry reputation.
Questions to Ask Potential Custodians
- What types of real estate do you allow?
- What are your transaction fees, annual fees, and additional charges?
- How long do property purchase transactions typically take?
- Do you provide guidance on prohibited transactions?
- What happens if my property needs emergency repairs?
- Can you accommodate non-recourse financing?
Understanding Fee Structures
Custodians charge various fees including account setup, annual maintenance, transaction fees, and asset-based fees. Some use flat-rate pricing while others charge based on account value. Calculate total costs for your expected activity level.
Customer Support Quality
You’ll need accessible, knowledgeable support throughout your investment journey. Test responsiveness by asking questions during your research phase and reading customer reviews from other real estate investors.
Benefits of Real Estate in Your IRA
Tax Advantages
All rental income, capital gains, and property appreciation grow tax-deferred or tax-free within your IRA. You don’t pay annual income taxes on rental profits or capital gains taxes when selling properties.
Portfolio Diversification
Real estate provides tangible assets uncorrelated with stock market performance. Property investments can balance market volatility and provide stability during economic downturns.
Inflation Protection
Real estate typically appreciates over time and rents increase with inflation. Physical properties maintain intrinsic value even during economic uncertainty, protecting your purchasing power.
Passive Income Generation
Rental properties create steady cash flow that accumulates in your IRA. This income can fund additional investments or build reserves for property expenses and future opportunities.
Long-Term Appreciation Potential
Property values historically increase over extended periods, building substantial wealth for retirement. Strategic location selection and property improvements can accelerate appreciation.
Common Mistakes to Avoid
Using Property Before Retirement
Never stay in vacation rentals, store personal items in storage facilities, or conduct business from IRA-owned commercial space. Any personal use disqualifies your IRA immediately.
Insufficient Cash Reserves
Maintain adequate liquidity in your IRA for unexpected repairs, vacancies, and ongoing expenses. Running out of cash can force prohibited transactions or property distress.
Improper Titling
Double-check all documents before signing. Incorrect titling delays transactions and may create compliance issues. Always use your custodian’s exact required format.
Mixing Personal and IRA Funds
Never combine personal money with IRA funds for property purchases or expenses. Keep all transactions completely separate and properly documented.
Inadequate Due Diligence
Research properties thoroughly including inspections, title searches, environmental assessments, and market analysis. Your custodian doesn’t vet investments for quality or suitability.
Ignoring Professional Advice
Consult with tax advisors, real estate attorneys, and financial planners familiar with self-directed IRAs. Professional guidance helps you avoid costly mistakes and optimize your strategy.
Real-World Investment Scenarios
Scenario 1: Rental Property Investment
You have $150,000 in your Traditional IRA from a 401(k) rollover. You purchase a single-family rental home for $140,000 (keeping $10,000 for reserves and closing costs). The property generates $1,200 monthly rent ($14,400 annually). After expenses, you net $8,000 annually, which grows tax-deferred in your IRA.
Scenario 2: Partner Investment
You and two friends each have $100,000 in your IRAs. Together, you purchase a $300,000 duplex, with each IRA owning 33.3%. Rental income and expenses are split proportionally, and each IRA receives one-third of profits or appreciation at sale.
Scenario 3: Leveraged Purchase
Your Roth IRA has $75,000. You use this as a 30% down payment on a $250,000 commercial property with a non-recourse loan covering the remaining $175,000. The property generates $24,000 annual income, with 70% (the leveraged portion) potentially subject to UDFI taxes.
Scenario 4: Private Lending
You use your $200,000 IRA to provide a hard money loan to a house flipper. The borrower pays 10% interest ($20,000 annually) secured by the property. Your IRA receives tax-advantaged interest income without property management responsibilities.
Prohibited Transaction Examples
What Happens If You Violate Rules
The IRS treats your entire IRA as distributed immediately upon a prohibited transaction. You owe income taxes on the full account value, plus a 10% early withdrawal penalty if under age 59½, plus potential 20% accuracy-related penalties.
Common Violations
- Buying property from your father and renting it to your son
- Using your tools to repair an IRA-owned rental
- Staying at your IRA’s vacation rental during personal trips
- Paying property expenses with your credit card
- Collecting real estate commissions on IRA transactions
- Selling personal property to your IRA at inflated prices
How to Stay Compliant
Before any transaction, ask: “Does this provide me or a disqualified person immediate benefit?” If yes, don’t proceed. Consult legal counsel when uncertain about transaction permissibility.
Exit Strategies and Distributions
Selling IRA-Owned Property
When you sell property, all proceeds return to your IRA tax-free (Roth) or tax-deferred (Traditional). You can reinvest in other properties, diversify into different assets, or hold cash for future opportunities.
Taking Distributions
You can begin penalty-free withdrawals from Traditional IRAs at age 59½. Roth IRAs allow tax-free withdrawals at 59½ if the account has been open five years. Earlier withdrawals incur 10% penalties plus income taxes.
In-Kind Property Distributions
You can transfer property ownership from your IRA to your personal name as a distribution. The property’s appraised value counts as your distribution amount, subject to applicable taxes and penalties.
Required Minimum Distributions
Traditional IRAs require annual RMDs starting at age 73. Have properties professionally appraised each year to calculate correct distribution amounts. You can satisfy RMDs with cash from other sources or by distributing property.
Frequently Asked Questions
Can I live in a property my Self-Directed IRA owns?
No. IRS rules strictly prohibit you and all disqualified persons (spouse, children, parents, grandparents) from personally using IRA-owned property at any time. This includes living in homes, vacationing at rentals, or using commercial space for business. Violating this rule disqualifies your entire IRA, triggering immediate taxes and penalties.
How do I handle property repairs if I can’t do the work myself?
All repairs must be performed by unrelated third-party contractors who invoice your IRA directly. You can research contractors, get estimates, and coordinate work (desk work), but you cannot perform physical labor, use your tools, or provide sweat equity. Payment comes exclusively from your IRA funds.
Can my IRA partner with my personal funds to buy property?
Yes. Your IRA can co-invest with your personal money or with disqualified persons for new purchases. Each party owns a proportionate share. However, your IRA cannot buy property from you or sell property to you. The partnership must involve acquiring new assets from third parties.
What happens if I accidentally violate a rule?
The IRS treats the entire IRA as distributed immediately, subjecting the full account value to income taxes. If you’re under 59½, you also owe a 10% early withdrawal penalty. Additional accuracy-related penalties of 20% may apply. There’s no fixing prohibited transactions retroactively.
Can I use a Self-Directed Roth IRA for real estate?
Yes. Roth IRAs follow the same rules as Traditional IRAs for real estate investing. The advantage is that all rental income and property appreciation grow completely tax-free, and you take tax-free withdrawals in retirement after age 59½ (with a five-year account seasoning period).
Meta Title: How to Buy Real Estate with Self-Directed IRA: Complete Legal Guide
Meta Description: Learn the step-by-step process to buy real estate using a Self-Directed IRA. Discover tax benefits, IRS rules, property types, and strategies to grow your retirement wealth.
Slug: how-to-buy-real-estate-self-directed-ira-legal-guideA Self-Directed IRA lets you invest retirement funds directly into real estate properties like rental homes, commercial buildings, and raw land while enjoying tax advantages. You control the investment decisions, but you must follow strict IRS rules to maintain your account’s tax-advantaged status and avoid severe penalties.
Quick Facts About Self-Directed IRA Real Estate
| Feature | Details |
|---|---|
| Account Types | Traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA, Solo 401(k) |
| Tax Benefits | Tax-deferred growth (Traditional) or tax-free withdrawals (Roth) |
| Property Types | Residential, commercial, raw land, REITs, mortgage notes |
| Minimum Investment | Varies by custodian (typically $1,000-$5,000 to open account) |
| Annual Contribution Limits | $7,000 under age 50; $8,000 age 50+ (2026) |
| Personal Use | Strictly prohibited for you and family members |
| Financing Options | Non-recourse loans only (no personal guarantees) |
What Is a Self-Directed Real Estate IRA?
A Self-Directed Real Estate IRA is a retirement account that allows you to invest in physical properties instead of limiting you to stocks and bonds. The account holder makes all investment decisions while a custodian handles administrative tasks and ensures IRS compliance.
You can use either a Traditional IRA (pre-tax contributions with tax-deferred growth) or a Roth IRA (after-tax contributions with tax-free withdrawals). The account functions like a standard IRA but opens the door to alternative investments that traditional brokerages don’t offer.
Types of Real Estate You Can Buy
Residential Properties
You can purchase single-family homes, duplexes, condominiums, townhomes, and multi-family apartment buildings. All rental income flows back into your IRA, and all property expenses must be paid from IRA funds.
Commercial Properties
Office buildings, retail spaces, warehouses, storage facilities, and industrial properties are allowed investments. Commercial properties often generate higher rental income and provide longer lease terms than residential options.
Raw and Improved Land
Undeveloped land requires minimal maintenance and offers long-term appreciation potential. Improved land with utilities and infrastructure increases development opportunities and property value.
Trust Deeds and Mortgage Notes
Your IRA can act as the lender by providing funds to borrowers with real estate-backed security. Principal and interest payments accrue in your retirement account tax-deferred or tax-free.
Real Estate Investment Trusts (REITs)
Private REITs allow you to invest in large-scale properties without direct management responsibilities. Your IRA owns shares in the trust rather than physical property.
Special Property Types
Storage facilities, mobile home parks, vacation rentals, and even vineyards are permissible investments. These alternative properties can provide steady income streams with relatively low maintenance requirements.
Investment Methods: Four Ways to Purchase Property
| Investment Method | Description | Best For |
|---|---|---|
| Direct Purchase | IRA buys property outright with cash | Investors with sufficient funds in one or multiple IRAs |
| Partnering with Others | Multiple investors pool funds (tenant-in-common) | Buyers needing additional capital; splits income/expenses proportionally |
| Non-Recourse Loans | IRA obtains financing secured only by property | Investors wanting leverage without personal liability |
| Equity-Structured Entities | LLC or Limited Partnership holds property | Multiple investors or checkbook control seekers |
Direct Purchase
This straightforward method works when you have adequate cash in your IRA. You can transfer funds from existing IRAs or roll over 401(k) funds to complete the purchase.
Investing with Others
Your IRA can co-invest with other individuals or their IRAs. Each party owns a proportionate share of the property and receives their percentage of income while paying their share of expenses.
Non-Recourse Loans
These specialized loans are backed exclusively by the property itself, not your personal credit. The lender can only seize the property if you default. Note that leveraged properties may trigger Unrelated Debt Financed Income (UDFI) taxes on the financed portion.
LLC or Partnership Structures
Real estate held through an LLC or Limited Partnership provides checkbook control and flexibility. Your IRA owns membership interest in the entity, which owns the property. Most custodians require multi-member structures rather than single-member LLCs.
Step-by-Step Process to Buy Real Estate
Step 1: Choose Your Self-Directed IRA Custodian
Select a custodian specializing in alternative investments and real estate. Look for companies with strong customer support, transparent fee structures, and experience handling property transactions. Traditional banks and brokerages rarely offer self-directed options.
Step 2: Open Your Account
Complete the custodian’s application process online or with paper forms. Provide identification, proof of income, and other required documentation. Decide whether you want a Traditional IRA (tax-deferred) or Roth IRA (tax-free withdrawals).
Step 3: Fund Your Self-Directed IRA
Transfer funds from existing IRAs, roll over 401(k) or other workplace retirement plans, or make annual contributions up to IRS limits. Transfers and rollovers don’t count toward annual contribution limits.
Step 4: Identify and Research Your Property
You’re responsible for all due diligence, including property inspections, market research, and financial analysis. Consult with real estate agents familiar with IRA purchases and work with professionals who understand self-directed retirement accounts.
Step 5: Make an Offer with Correct Titling
Submit your purchase offer with proper IRA titling from the beginning. The property must be titled in your custodian’s name for your benefit, such as “ABC Trust Company Custodian FBO John Smith IRA.” Never put the property in your personal name.
Step 6: Direct Your Custodian to Purchase
Submit a Buy Direction Letter to your custodian with purchase details, property information, and funding instructions. Your custodian sends funds directly to the closing agent or seller.
Step 7: Maintain Proper Records
Keep all property-related documents, receipts, and correspondence organized. Your custodian handles tax reporting, but you need records for property management and future transactions.
Critical IRS Rules You Must Follow
Property Titling Requirements
All property must be titled in the custodian’s name for the benefit of your IRA. Example: “Madison Trust Company Custodian FBO Sarah Johnson IRA Account #12345.” Never use your personal name on the title or you’ll trigger immediate taxation.
No Personal Use Allowed
You cannot live in, vacation at, or personally use any property your IRA owns. This restriction extends to all disqualified persons including your spouse, children, parents, grandparents, and their spouses. Violating this rule disqualifies your entire IRA.
No Self-Dealing Transactions
Your IRA cannot purchase property you currently own or buy property from disqualified persons. You cannot sell your personal property to your IRA or engage in any transaction providing immediate personal benefit.
No Sweat Equity or Personal Labor
You cannot perform repairs, improvements, or maintenance on IRA-owned property yourself. This includes using your personal tools or equipment. All work must be completed by unrelated third-party contractors paid directly from your IRA.
No Personal Compensation
If you’re a real estate agent, you cannot collect commissions on your IRA’s property transactions. Property managers cannot charge fees for managing their own IRA’s properties. All compensation must be waived or the transaction must involve unrelated parties.
All Expenses Paid from IRA
Property taxes, insurance, repairs, utilities, HOA fees, and all other expenses must be paid using IRA funds. You cannot use personal funds or credit cards for IRA-owned property expenses. Keep sufficient cash reserves in your IRA for ongoing costs.
All Income Returns to IRA
Rental payments, lease income, and property sale proceeds must flow directly to your IRA. Tenants should make checks payable to your custodian FBO your account, not to you personally. Taking constructive receipt of income triggers taxation.
Who Are Disqualified Persons?
The IRS defines disqualified persons as:
- You (the IRA owner)
- Your spouse
- Your children and their spouses
- Your parents and their spouses
- Your grandparents and grandchildren
- Any entity you control with 50% or more ownership
- Fiduciaries, investment advisors, and service providers to your IRA
Tax Considerations for Real Estate IRAs
Tax-Deferred vs. Tax-Free Growth
Traditional IRAs provide tax-deferred growth, meaning you pay taxes when you withdraw funds in retirement. Roth IRAs offer tax-free growth and withdrawals after age 59½ when the account has been open for five years.
Unrelated Business Taxable Income (UBTI)
If your IRA actively operates a business (like flipping houses frequently), it may generate UBTI subject to income tax. Passive rental income typically doesn’t trigger UBTI.
Unrelated Debt Financed Income (UDFI)
When your IRA uses non-recourse financing, the income from the leveraged portion becomes taxable as UDFI. For example, if you finance 50% of a property and earn $10,000 in rental income, $5,000 may be subject to UDFI taxes.
Form 990-T Filing Requirements
Your IRA must file Form 990-T if it generates $1,000 or more in UBTI or UDFI during the tax year. The IRA itself pays the tax, not you personally.
Required Minimum Distributions (RMDs)
Traditional IRAs require annual withdrawals starting at age 73. You’ll need property appraisals to calculate RMDs accurately, which adds ongoing costs. You can satisfy RMDs with cash from other accounts or by distributing property portions.
Checkbook Control: Managing Your Investments
What Is Checkbook Control?
Checkbook control allows you to make investment decisions and transactions without waiting for custodian approval. You establish an LLC or Trust owned by your IRA, then open a checking account for the entity.
Benefits of Checkbook IRAs
You can act quickly on investment opportunities, avoid per-transaction custodian fees, and manage day-to-day property expenses efficiently. This structure works best for rental properties, fix-and-flips, and investments requiring frequent transactions.
How to Set Up Checkbook Control
Work with a company specializing in IRA LLCs to create proper legal structure. Your IRA purchases membership interest in the LLC, which then owns the property. You serve as LLC manager, controlling the checking account while maintaining compliance.
Important Limitations
Even with checkbook control, you must follow all IRS rules regarding prohibited transactions and disqualified persons. The LLC cannot engage in activities that would violate IRA regulations.
Financing Your Real Estate Purchase
Understanding Non-Recourse Loans
Non-recourse loans are secured exclusively by the property with no personal guarantee. If you default, the lender can only seize the collateral property and cannot pursue your other assets or IRA funds.
Finding Non-Recourse Lenders
Traditional banks rarely offer these loans. Work with specialized lenders experienced in self-directed IRA financing. Expect higher interest rates and larger down payments (typically 30-40%) compared to conventional mortgages.
Loan Terms and Requirements
Non-recourse loans usually have shorter terms (15-20 years), higher interest rates, and stricter qualification criteria. The lender evaluates the property’s income potential rather than your personal credit score.
UDFI Tax Implications
Remember that leveraged properties trigger UDFI taxes on the financed income portion. Factor these taxes into your investment calculations when deciding whether to use financing.
Property Management Best Practices
Hiring a Property Manager
While not required, professional property management is highly recommended for rental properties. The manager handles tenant relations, rent collection, and maintenance coordination, ensuring all funds flow properly to your IRA.
Rent Collection Procedures
Tenants must make payments directly to your IRA custodian or LLC (if using checkbook control). Never accept rent checks made out to you personally, even temporarily, as this constitutes prohibited constructive receipt.
Maintenance and Repairs
Schedule regular property inspections and address maintenance issues promptly. All contractors must invoice your IRA directly and receive payment from IRA funds. Keep detailed records of all work performed and expenses paid.
Insurance Requirements
Maintain adequate property insurance, liability coverage, and landlord policies. Ensure all policies list your IRA custodian or LLC as the insured party, not your personal name.
Choosing the Right Self-Directed IRA Custodian
Key Selection Criteria
Look for custodians with extensive real estate experience, transparent fee structures, responsive customer service, and strong regulatory compliance history. Check their state banking department oversight and industry reputation.
Questions to Ask Potential Custodians
- What types of real estate do you allow?
- What are your transaction fees, annual fees, and additional charges?
- How long do property purchase transactions typically take?
- Do you provide guidance on prohibited transactions?
- What happens if my property needs emergency repairs?
- Can you accommodate non-recourse financing?
Understanding Fee Structures
Custodians charge various fees including account setup, annual maintenance, transaction fees, and asset-based fees. Some use flat-rate pricing while others charge based on account value. Calculate total costs for your expected activity level.
Customer Support Quality
You’ll need accessible, knowledgeable support throughout your investment journey. Test responsiveness by asking questions during your research phase and reading customer reviews from other real estate investors.
Benefits of Real Estate in Your IRA
Tax Advantages
All rental income, capital gains, and property appreciation grow tax-deferred or tax-free within your IRA. You don’t pay annual income taxes on rental profits or capital gains taxes when selling properties.
Portfolio Diversification
Real estate provides tangible assets uncorrelated with stock market performance. Property investments can balance market volatility and provide stability during economic downturns.
Inflation Protection
Real estate typically appreciates over time and rents increase with inflation. Physical properties maintain intrinsic value even during economic uncertainty, protecting your purchasing power.
Passive Income Generation
Rental properties create steady cash flow that accumulates in your IRA. This income can fund additional investments or build reserves for property expenses and future opportunities.
Long-Term Appreciation Potential
Property values historically increase over extended periods, building substantial wealth for retirement. Strategic location selection and property improvements can accelerate appreciation.
Common Mistakes to Avoid
Using Property Before Retirement
Never stay in vacation rentals, store personal items in storage facilities, or conduct business from IRA-owned commercial space. Any personal use disqualifies your IRA immediately.
Insufficient Cash Reserves
Maintain adequate liquidity in your IRA for unexpected repairs, vacancies, and ongoing expenses. Running out of cash can force prohibited transactions or property distress.
Improper Titling
Double-check all documents before signing. Incorrect titling delays transactions and may create compliance issues. Always use your custodian’s exact required format.
Mixing Personal and IRA Funds
Never combine personal money with IRA funds for property purchases or expenses. Keep all transactions completely separate and properly documented.
Inadequate Due Diligence
Research properties thoroughly including inspections, title searches, environmental assessments, and market analysis. Your custodian doesn’t vet investments for quality or suitability.
Ignoring Professional Advice
Consult with tax advisors, real estate attorneys, and financial planners familiar with self-directed IRAs. Professional guidance helps you avoid costly mistakes and optimize your strategy.
Real-World Investment Scenarios
Scenario 1: Rental Property Investment
You have $150,000 in your Traditional IRA from a 401(k) rollover. You purchase a single-family rental home for $140,000 (keeping $10,000 for reserves and closing costs). The property generates $1,200 monthly rent ($14,400 annually). After expenses, you net $8,000 annually, which grows tax-deferred in your IRA.
Scenario 2: Partner Investment
You and two friends each have $100,000 in your IRAs. Together, you purchase a $300,000 duplex, with each IRA owning 33.3%. Rental income and expenses are split proportionally, and each IRA receives one-third of profits or appreciation at sale.
Scenario 3: Leveraged Purchase
Your Roth IRA has $75,000. You use this as a 30% down payment on a $250,000 commercial property with a non-recourse loan covering the remaining $175,000. The property generates $24,000 annual income, with 70% (the leveraged portion) potentially subject to UDFI taxes.
Scenario 4: Private Lending
You use your $200,000 IRA to provide a hard money loan to a house flipper. The borrower pays 10% interest ($20,000 annually) secured by the property. Your IRA receives tax-advantaged interest income without property management responsibilities.
Prohibited Transaction Examples
What Happens If You Violate Rules
The IRS treats your entire IRA as distributed immediately upon a prohibited transaction. You owe income taxes on the full account value, plus a 10% early withdrawal penalty if under age 59½, plus potential 20% accuracy-related penalties.
Common Violations
- Buying property from your father and renting it to your son
- Using your tools to repair an IRA-owned rental
- Staying at your IRA’s vacation rental during personal trips
- Paying property expenses with your credit card
- Collecting real estate commissions on IRA transactions
- Selling personal property to your IRA at inflated prices
How to Stay Compliant
Before any transaction, ask: “Does this provide me or a disqualified person immediate benefit?” If yes, don’t proceed. Consult legal counsel when uncertain about transaction permissibility.
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Exit Strategies and Distributions
Selling IRA-Owned Property
When you sell property, all proceeds return to your IRA tax-free (Roth) or tax-deferred (Traditional). You can reinvest in other properties, diversify into different assets, or hold cash for future opportunities.
Taking Distributions
You can begin penalty-free withdrawals from Traditional IRAs at age 59½. Roth IRAs allow tax-free withdrawals at 59½ if the account has been open five years. Earlier withdrawals incur 10% penalties plus income taxes.
In-Kind Property Distributions
You can transfer property ownership from your IRA to your personal name as a distribution. The property’s appraised value counts as your distribution amount, subject to applicable taxes and penalties.
Required Minimum Distributions
Traditional IRAs require annual RMDs starting at age 73. Have properties professionally appraised each year to calculate correct distribution amounts. You can satisfy RMDs with cash from other sources or by distributing property.
Frequently Asked Questions
Can I live in a property my Self-Directed IRA owns?
No. IRS rules strictly prohibit you and all disqualified persons (spouse, children, parents, grandparents) from personally using IRA-owned property at any time. This includes living in homes, vacationing at rentals, or using commercial space for business. Violating this rule disqualifies your entire IRA, triggering immediate taxes and penalties.
How do I handle property repairs if I can’t do the work myself?
All repairs must be performed by unrelated third-party contractors who invoice your IRA directly. You can research contractors, get estimates, and coordinate work (desk work), but you cannot perform physical labor, use your tools, or provide sweat equity. Payment comes exclusively from your IRA funds.
Can my IRA partner with my personal funds to buy property?
Yes. Your IRA can co-invest with your personal money or with disqualified persons for new purchases. Each party owns a proportionate share. However, your IRA cannot buy property from you or sell property to you. The partnership must involve acquiring new assets from third parties.
What happens if I accidentally violate a rule?
The IRS treats the entire IRA as distributed immediately, subjecting the full account value to income taxes. If you’re under 59½, you also owe a 10% early withdrawal penalty. Additional accuracy-related penalties of 20% may apply. There’s no fixing prohibited transactions retroactively.
Can I use a Self-Directed Roth IRA for real estate?
Yes. Roth IRAs follow the same rules as Traditional IRAs for real estate investing. The advantage is that all rental income and property appreciation grow completely tax-free, and you take tax-free withdrawals in retirement after age 59½ (with a five-year account seasoning period).
