With a truly self-directed IRA, you aren't limited to the stock market. You can purchase real estate assets ranging from residential and commercial properties to raw land, mobile homes, and more as alternative investments for your IRA.
For an IRA owner, this allows greater account diversification that gives additional protection from the volatile stock market. And if you have real estate knowledge or are a real estate investor, it's a smart way to capitalize on your expertise. Your real estate investment grows tax-free (Roth IRA) or tax-deferred (Traditional IRA), depending on the account type.
Beyond diversifying your retirement portfolio, self-directed IRAs do not limit your investments to a specific geographical area. You can purchase real estate pretty much in any country that will allow it.
To hold real estate or other alternative assets in an IRA, you need a self-directed IRA administered by a custodian that permits those investments. The custodian holds the assets on behalf of the IRA and processes transactions according to the account owner’s instructions.
The process begins with finding a property you want your IRA to purchase. You then submit the required documents and instructions to your self-directed IRA custodian, which completes the transaction on behalf of the IRA.
You do not need to withdraw the funds from your IRA to make the purchase. Because the property is an IRA asset, the purchase contract and title must identify the IRA as the buyer and owner. Income generated by the property must return to the IRA, and property-related expenses must be paid with IRA funds.
Income and gains generally remain tax-deferred in a Traditional IRA or tax-free in a Roth IRA when the applicable requirements are met. If the IRA uses a non-recourse loan, the debt-financed portion of the income may be subject to unrelated business income tax (UBIT).
A direct purchase allows your IRA to buy a property outright, but your IRA does not always need the full purchase amount. It may use a non-recourse loan or partner with another IRA or investor. Your IRA may also participate in private lending through promissory notes. Financing and partnership arrangements must follow IRS rules, and the IRA’s ownership percentage should be established when the investment is purchased.
Another option is a self-directed IRA LLC, often called a Checkbook IRA. The LLC can hold multiple investments, while IRAR holds the LLC as a single IRA asset. This structure may simplify certain transactions and affect how account fees are calculated.
Your strategy may also depend on the type of retirement account you use. Real estate held in a Traditional IRA and real estate held in a Roth IRA have different tax considerations, particularly when taking distributions.
These strategies may be combined when the transaction is structured properly. For example, an IRA LLC may partner with another person’s self-directed retirement account. Before combining IRA and personal funds or partnering with another investor, consult a qualified tax or legal professional to confirm that the arrangement complies with prohibited transaction rules.
A self-directed Roth IRA can hold real estate and other alternative assets. Earnings can grow tax-free, and qualified distributions are tax-free when the Roth IRA distribution requirements are met.
When developing a real estate investment strategy for your retirement account, consider consulting a qualified financial, tax, or legal professional.
When investing in real estate with a self-directed IRA, there are several real estate IRA rules you need to follow to avoid significant tax penalties. Under IRS rules, you cannot live or vacation in your investment property, and certain family members and disqualified persons cannot benefit from it. You also cannot sell, exchange, or lease property you already own to your IRA. These are considered prohibited transactions.
IRA owners should keep enough money in their self-directed retirement accounts to cover expenses such as taxes, insurance, utilities, and repairs. For example, if your IRA property needs a new roof, the funds must come from your IRA to pay a contractor. You cannot do the work yourself because that may be considered a prohibited transaction. While you are not required to hire a property manager to collect rent, consider whether doing so makes sense for your investment strategy. You are also responsible for updating the value of your assets annually.
When you self-direct your retirement account, you are responsible for all investment decisions, from choosing an SDIRA custodian to finding investments that support your retirement goals. Understanding and following real estate IRA rules is also your responsibility.
If you are considering investing in real estate with your IRA, you have many options. These may include single-family and multifamily homes, rental properties, commercial real estate, mortgage notes, international property, undeveloped land, real estate investment trusts (REITs), and more. You do not need to withdraw money from your IRA to invest because real estate is an allowed IRA investment.
Consider working with a qualified real estate professional who understands the market, along with your financial, tax, or legal advisor. They can help you evaluate investments and develop a real estate strategy that supports your retirement goals.
We want you to build retirement wealth at a lower cost, fees have a major impact on your retirement account. While some real estate IRA custodians increase their fees as your real estate assets grow in value, IRAR charges a flat annual fee, allowing you to save more than 50 percent compared to most providers.
Download this template to conduct due diligence and discover the benefits of working with IRAR.
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