Self-Directed IRA & Real Estate: The Real Estate IRA

Invest in residential and commercial properties, mortgage notes, land, and more.

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What is a Self-Directed IRA for Real Estate?

A Self-Directed IRA for real estate, also known as a Real Estate IRA, lets you invest directly in properties. Unlike traditional IRAs limited to certain asset classes like stocks, bonds, and mutual fund, these types of retirement accounts allow you to build retirement wealth with alternative assets including.

You can choose from a self-directed Roth IRA, Traditional IRA, SEP IRA, SIMPLE IRA, or Solo 401(k). You take full control: buy, sell, and find your rental properties, vacation homes, or even commercial ventures, all within the tax-advantages of your IRA— no penalties.

Benefits of Self-Directed IRAs and Real Estate

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.

Using an IRA to Invest in Real Estate

How Real Estate IRAs Work

To invest in alternative assets, you need a self-directed IRA. The IRS states that you must invest via a passive third party. Many investors choose a self directed IRA custodian because of the protections that come with additional oversight.

The process is not too different from a regular real estate purchase. You find the property that you want to purchase with your IRA. You instruct your real estate IRA custodian what you want to purchase, and the custodian makes the transaction on your behalf. You do not need to cash out your IRA and pay taxes.

You do not need to cash out your IRA and pay taxes. You need a self-directed IRA to buy the real estate. Because the property is an IRA investment, the purchase contract is made in the name of the IRA. The income generated from the investment goes back to the IRA. Expenses for the property are paid from the IRA.

As long as the property is in your self directed IRA account, you generally do not have to pay taxes on the income from the rental property. However, if you use a non-recourse loan to buy real estate, the debt financed portion of profit is subject to UBIT

Real Estate IRA Investment Strategies

While you can do a direct purchase, (buying  properties outright) you do not need to have the full purchase amount in your self-directed IRA to buy property. You can use your IRA to get a non-recourse loan to buy investment properties or bring in another IRA or individual(s) to partner on the investment. Your IRA can also do private lending through promissory notes.

Another way to substantially save on fees is to open a self directed IRA LLC. Often called a Checkbook IRA, an IRA LLC is considered one asset with IRAR, meaning you're charged for a single asset, regardless of how many assets are within the LLC itself. The LLC holds multiple investments, while IRAR holds your LLC as one IRA investment.

Strategies can also include analyzing the type of retirement plan that is best for you based on your retirement goals. Taking distributions from an investment property that was purchased with Roth IRA funds vs Traditional IRA funds has different tax consequences because of the different tax advantages of each account.

These strategies can be mixed and matched in different ways maximizing your investment potential. For example, you can invest through an IRA LLC while partnering with your brother's self directed account.

Self-Directed Roth IRA & Real Estate

Real estate in any retirement account is great, real estate in a Roth IRA is a whole new level. With a Roth IRA, your investment grows tax-free! At retirement age, you do not pay taxes on your distributions. Also, there are no early withdrawal penalties if you meet the requirements. 

When figuring out your strategy to build retirement wealth, it's smart to seek investment advice from a qualified professional.

Self-Directed IRA Real Estate Rules

When it comes to investing in real estate with your self-directed IRA, there are several real estate IRA rules you need to pay attention to in order to avoid significant tax penalties. Per IRS rules, you cannot live or vacation in your investment property, and certain family members and disqualified persons cannot benefit in any way. You also cannot sell, exchange, or lease property you already own to your IRA — these are prohibited transactions.

IRA account owners keep enough money in their self directed retirement account to cover expenses like taxes, insurance, utilities, repairs, and more. 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 — this is considered a prohibited transaction. And while you do not need to hire a property manager to collect rent, you'll want to consider whether doing so makes sense for your investment strategy. Annually updating the value of your assets is also part of your responsibility.

When you self-direct your retirement account you are responsible for all investment decisions — from choosing the right SDIRA custodian to finding the types of investments that will help you grow your IRA.  Understanding real estate IRA rules is also your responsibility.

Types of Real Estate Investments

If you are considering investing in real estate with your IRA, the investment options are many. These include single and multi-family homes, commercial and rental properties, mortgage notes, international property, land, Real Estate Investment Trusts (REIT), and more. Also, you do not need to cash out your IRA and pay taxes because real estate is an allowed investment in IRAs.

To maximize your savings for retirement and take advantage of the tax benefits of IRAs, enlist the expertise of a qualified real estate agent who understands the intricacies of the real estate market and works alongside your financial advisor. Together, they can help you devise a winning investment strategy in real estate that aligns with your goals.

Choosing IRAR Trust Company as Your Real Estate IRA Custodian

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. You also get personalized service from our SDIRA experts every time you call or email. 

Download this template  to conduct due diligence and discover the benefits of working with IRAR.

Compare Custodians Template

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Top 3 Questions About Self-Directed IRA Real Estate Investments

What are the pitfalls of owning real estate in an IRA?

The only disadvantage of investing in real estate through a self-directed IRA is the illiquidity of the asset. This means that accessing funds quickly may not be easy. Unlike other investment strategies, like day trading, selling a property held within an IRA can be a longer process.

Can I use my IRA to buy a house?

As long as you are using the IRA to buy rental property, this is allowed. However, since the investment property will be in the name of your IRA, there are restrictions on who can use it. You can't live there yourself, nor can any close family members (like spouses, children, or parents) benefit from it by living there.

Can I use my IRA as a down payment on a second home?

No, using an IRA property for a second home isn't allowed. Although real estate can be held in an IRA, it must be for investment purposes. This means the property must be a rental generating income for your IRA, not a vacation home or another residence for you or your family. The key is avoiding personal benefit.


More Real Estate IRA FAQs

Can you buy real estate with an IRA? 

Yes! Buying real estate with an IRA for investment purposes is allowed. IRA law does not prohibit investing in real estate. However, not all IRA custodians or big banks offer this option— they may even tell you it's not allowed. Many CPAs and financial professionals are also unaware that real estate can be an IRA asset and might also tell you that it's not allowed, but it is. You need a self-directed IRA custodian in order to invest in real estate with your IRA.

To learn about the types of investments the IRS prohibits, visit our Self-Directed IRA Rules page.

How do I use IRA money to buy real estate? 

If you have retirement savings you can transfer these to a self-directed IRA. First, you need to open a self-directed IRA. Then, transfer the IRA money. If you do not hold cash in your account, you can liquidate the assets and move the cash to the self-directed IRA.

How much does a self-directed IRA cost? 

The fees for a self-directed IRA vary from custodian-to-custodian in the range of $199-$2,000. When you compare custodians you’re more likely to find the best match for your investment strategy. 

How does a real estate IRA work? 

You need to open a self-directed IRA to purchase real estate assets with your retirement savings. If you have an existing IRA at another custodian like Fidelity or Schwab, you can transfer it to the self-directed IRA. Your self-directed IRA custodian makes the purchase with your savings. The income and expenses from the property flow in and out of the IRA. The real estate is for investment purposes and NOT for personal use.

How do I set up a self-directed IRA for real estate? 

To set up an IRA for real estate investments, you need to open a self-directed IRA (SDIRA). You will need a form of ID and a credit card to pay the new account fee. When your SDIRA has been stablished, you can add funds to the self-directed IRA and instruct the custodian what property to purchase on behalf of your IRA.

What is a Real Estate IRA? 

A real estate IRA is a self-directed individual retirement account (SDIRA) that you can use to hold real estate as an investment. Unlike regular IRAs, you directly find, buy, and sell real estate assets in your account.

What is a self-directed IRA? 

It is a retirement savings account that is tax-deferred or tax-free (depending on the IRA) and allows you to invest the retirement savings in real estate and other non-traditional asset like; private placements, private stock, precious metals,  and many other alternative assets.

Is this a this an IRA home purchasing strategy? 

No. You're not taking a loan from the IRA. You're using your retirement savings to directly purchase the investment property. You can't live in the property yourself or benefit from it directly. 

However, you can reap the rewards through rental income or potential appreciation in value. The rent you earn goes back into the IRA and grows tax-deferred (Traditional IRA) or tax-free (Roth IRA). That means no reporting the income on your personal tax return.

Who owns property in self-directed IRA? 

When it comes to owning property in a self-directed IRA, the IRA itself owns the property, not the individual. The property is an asset of the IRA and any income or expenses related to the property flow through the IRA. This means that any rental income, property taxes, or maintenance costs are to be paid using the funds within the IRA.

Self-Directed IRAs & Real Estate Guide

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