7 Self-Directed IRA Real Estate Rules Investors Should Know

Many real estate investors are unaware that a range of assets, including real estate, can be leveraged through individual retirement accounts (IRAs) or other eligible tax-deferred accounts. Most investors are familiar with mutual funds offered by brokers.

A real estate IRA is used to make real estate investments through a self-directed individual retirement account (SDIRA). This can be done through a Traditional, Roth, SEP, or SIMPLE self-directed IRA. SDIRAs give investors the freedom to choose how they would like to buy, select, and sell the real estate assets held in their account.

To avoid losing the benefits of your tax-advantaged retirement account, you’ll want to make sure you can smoothly navigate the rules for buying real estate in an IRA. This guide will cover self-directed IRA real estate purchase rules to be aware of when making your investment decisions.

Can You Buy Real Estate With a Self-Directed IRA?

Yes. A self-directed IRA may purchase eligible investment real estate. The property must be purchased for the benefit of the retirement account, titled in the IRA’s name, and kept separate from the account owner’s personal finances and use.

Related Article: Roth IRA Real Estate Investment Rules

Your IRA Cannot Buy Property From You or a Disqualified Person

Real estate self-directed IRA rules instituted by the IRS prevent investors from double-dipping in their investment by prohibiting homeowners from using their IRA to purchase a property they currently own. IRS regulations restrict investors from “self-dealing” by precluding any disqualified person, including yourself, certain family members, and others from using an SDIRA to buy or sell property among themselves.

Apart from yourself, the IRS lists disqualified individuals as anyone who is your beneficiary, your fiduciary, and certain members of your family.

You Cannot Personally Use or Benefit Directly From the IRA-Owned Real Estate

Self-Directed IRA real estate investment rules aim to ensure that you provide for your retirement at some point in the future, not today. Whether it's an investment property, vacation home, or rented office space owned by your SDIRA, self-directed IRA real estate rules exclude investors from engaging in prohibited transactions.

The IRS has implemented this rule to prevent any transaction from indirectly benefiting the account owner or a disqualified person. For example, staying in your IRA owned beach rental is not allowed. Your children cannot use it either, it's a prohibited transaction.

 If the account owner or beneficiary engages in a prohibited transaction, the account may stop being treated as an IRA as of the first day of that tax year. The account’s assets may then be treated as distributed at fair market value, potentially resulting in taxable income and additional taxes or penalties.

You Cannot Personally Repair or Improve the Property

Performing work on a property that your IRA owns that falls under “sweat equity” and is considered a prohibited transaction. Although light “desk work” is permitted, it is advisable to consult with your financial or tax professional for guidance on your specific situation.

The Title of the Real Estate Investment Needs to Be in Name of Your IRA

IRA holders must ensure all documents related to the investment are titled correctly to differentiate between themselves as an entity and the account itself. In general, real estate IRA investment titles should be formatted like this: “IRAR Trust Company FBO (for benefit of) [Your Name] IRA account number.” That said, some exceptions apply, such is the case if your IRA will not outright own the investment. Here is an example of how the vesting should read when the property is owned outright by the IRA: IRAR Trust Company FBO John Doe, IRA #12345

You Can Partner With Investors To Purchase Real Estate Through Your SDIRA

SDIRA owners can partner their IRA with other qualified investors by entering into an agreement to share the purchase of a property. In this instance, each investor would own a portion of the property proportionate to the percentage of funds contributed. Profits gained would then be distributed in accordance with the proportionate ownership percentage.

Personal funds, otherwise normally disqualified persons, and other funding sources, like debt financing, may be combined with IRA funds when co-investing for a new purchase. As long as the financing is in the form of a non-recourse loan, the investment will still fall under real estate self-directed IRA rules.

Example of an IRA Real Estate Transaction

Assume an IRA purchases 75% of a rental property and an unrelated investor purchases the remaining 25%. The ownership percentages should appear in the purchase documents. The IRA would generally pay 75% of property expenses and receive 75% of the rental income and sale proceeds. The other investor would be responsible for the remaining 25%.

Before entering a partnership involving personal funds or a disqualified person, obtain tax or legal guidance because the structure and timing of the transaction matter.

You Must Pay Taxes (UBIT) For IRA Investments That Use Financing

An unrelated business income tax (UBIT) may apply if you obtain a non-recourse loan for your IRA's real estate investment. Taxes on profits are taken out in proportion to the percentage of debt-financing used to purchase the rental property.

Account holders can decrease the amount of taxes owed by reporting losses, and operating expenses. This write-off is also determined using a percentage basis. Check with a tax professional to find out how much you may be eligible to deduct.

The IRA Must Pay Expenses and Receive Income

All expenses related to an investment property owned by your self-directed IRA, maintenance, improvements, property taxes, association fees (HOA), and utility bills, must be paid from your IRA. You can do so by requesting the funds from your SDIRA custodian.

Similarly, any rental income generated by a property in your SDIRA, or sales proceeds, must be returned to your IRA custodian to be deposited back into your IRA.

How Can IRAR Help?

Investing in real estate with your IRA is not complicated if you follow the rules. These are explicitly available through the IRS, but some gray areas may come up for real estate investors. Although this guide provides guidance for the most important regulations to follow, there may still be some nuance.

This is where IRAR comes in! For more than 25 years, IRAR has empowered our clients to save for retirement using alternative investments at a lower cost. We are keenly aware that our clients rely on us to provide speedy response times to process time-sensitive requests regarding real estate.

Book a free consultation with one of our experts today. Find out how you can start using your IRA to buy real estate tax free, Roth IRA or tax deferred, Traditional IRA. Now is the time to build a retirement plan for a future of financial freedom.