Real estate is a time-tested strategy for building wealth, and combining it with a Self-Directed IRA (SDIRA) offers a powerful way to grow your retirement savings. While traditional IRAs limit you to stocks, bonds, and mutual funds, a Self-Directed IRA opens up a broader range of alternative assets—including real estate.
In this article, we’ll break down everything you need to know about real estate investing with a Self-Directed IRA: the benefits, rules, risks, and tips for success.
What is a Self-Directed IRA?
A Self-Directed IRA is a type of Individual Retirement Account that allows investors to hold alternative investments, such as:
- Real estate (residential or commercial)
- Private companies
- Precious metals
- Tax liens
- Cryptocurrency
Unlike traditional IRAs, Self-Directed IRAs are administered by custodians or trustees who permit alternative assets. However, you make the investment decisions, not the custodian.
Why Use a Self-Directed IRA for Real Estate Investing?
Real estate is an attractive asset for IRA investing due to its potential for:
| Benefit | Description |
|---|---|
| Tax-deferred or tax-free growth | Traditional SDIRAs offer tax-deferred growth, while Roth SDIRAs are tax-free. |
| Portfolio diversification | Helps hedge against stock market volatility. |
| Passive income | Rental income can grow retirement wealth over time. |
| Appreciation potential | Long-term growth in property value builds equity. |
This strategy is especially appealing to seasoned real estate investors and those looking for greater control over their retirement funds.
How to Invest in Real Estate Using a Self-Directed IRA
Here’s a step-by-step guide on how to invest in real estate with a Self-Directed IRA:
1. Open a Self-Directed IRA
You’ll need to set up an SDIRA with an IRS-approved custodian or trustee who offers real estate investment options. Some popular SDIRA custodians include:
- Equity Trust
- Entrust Group
- IRA Financial
- New Direction Trust Company
Tip: Compare custodians based on fees, services, and customer reviews.
2. Fund Your Account
You can fund your Self-Directed IRA through:
- IRA rollover from an existing IRA or 401(k)
- IRA transfer (trustee-to-trustee)
- Annual contributions (limited to $7,000 in 2025 for under 50, or $8,000 if over 50)
3. Choose the Property
Identify a property that aligns with your investment goals—residential rentals, vacation homes (not for personal use), commercial real estate, or even raw land.
Important: The property must be a purely investment asset. You cannot use or personally benefit from it.
4. Make the Purchase Through Your SDIRA
Once you’ve selected a property, the IRA makes the purchase, not you personally. All expenses, including taxes, maintenance, and improvements, must be paid from the IRA.
The property title will look like:
“[Custodian Name] FBO [Your Name] IRA”
Rules and Restrictions You Must Follow
The IRS has strict rules on what you can and cannot do with real estate inside a Self-Directed IRA. Violating these rules can result in penalties, taxes, or disqualification of your IRA.
Prohibited Transactions
You and certain “disqualified persons” cannot:
- Live in or use the property
- Rent the property to yourself or family members
- Provide labor (e.g., painting, repairs)
- Transfer ownership between yourself and the IRA
Disqualified Persons Include:
| Relation | Example |
|---|---|
| You | The account owner |
| Your spouse | Immediate disqualification |
| Lineal family | Parents, children, grandchildren |
| Fiduciaries | Financial advisors, real estate agents involved |
Pros and Cons of Using a Self-Directed IRA for Real Estate
✅ Pros
- Tax advantages (deferred or tax-free)
- Diversification beyond stocks and bonds
- Control over your retirement investments
- Passive income potential from rental properties
❌ Cons
- Strict rules and complex IRS regulations
- No personal benefit allowed from the property
- Lower liquidity than publicly traded assets
- High transaction and custodian fees
Types of Real Estate You Can Invest In
| Property Type | Permissible in SDIRA? | Notes |
|---|---|---|
| Single-family homes | ✅ Yes | For rental income or flipping (must follow rules) |
| Multi-family units | ✅ Yes | Ideal for long-term passive income |
| Commercial buildings | ✅ Yes | Requires more capital, but potential for higher returns |
| Raw land | ✅ Yes | Riskier but potentially high-appreciation |
| Vacation rentals (Airbnb) | ✅ Yes | Must not use personally at all |
| Primary residences | ❌ No | Personal use is strictly prohibited |
Tax Considerations
Even though your IRA offers tax benefits, there are still some important tax issues to watch out for:
Unrelated Business Income Tax (UBIT)
If your real estate investment involves debt financing (i.e., your IRA takes a loan to buy the property), part of the income may be subject to Unrelated Debt-Financed Income (UDFI) and UBIT.
| Scenario | Taxable Under UBIT? |
|---|---|
| All-cash purchase | ❌ No |
| Purchase with mortgage (non-recourse) | ✅ Yes |
| Active real estate business | ✅ Yes |
Always consult with a tax advisor who is familiar with Self-Directed IRAs.
Managing the Property Inside an IRA
You can’t personally manage the property. This includes:
- Collecting rent
- Paying for repairs from personal funds
- Doing physical maintenance
Instead, you must use property managers or third-party vendors, and all payments must be made from the IRA account.
Common Mistakes to Avoid
Here are frequent pitfalls investors make with real estate IRAs:
| Mistake | Why It’s a Problem |
|---|---|
| Using the property personally | Leads to disqualification and tax penalties |
| Commingling personal and IRA funds | Violates IRS rules |
| Not understanding UBIT implications | Can trigger unexpected taxes |
| Choosing the wrong custodian | Leads to administrative headaches and high fees |
| Underestimating liquidity needs | Real estate is not easily converted into cash |
Tips for Success
- Hire professionals: CPA, real estate attorney, and IRA custodian experienced with SDIRAs.
- Do due diligence: Treat the property like a real business investment.
- Keep detailed records: All income and expenses should be well documented.
- Consider an LLC within the IRA: Some investors create a checkbook control IRA using an LLC for easier management (consult your custodian).
Final Thoughts
Investing in real estate with a Self-Directed IRA offers powerful tax advantages and portfolio diversification—but it’s not for the faint of heart. You’ll need to understand IRS rules, work with the right custodians, and stay compliant at every step.
For experienced investors or those working with professionals, a real estate SDIRA can be a game-changer for building long-term, tax-advantaged wealth.
FAQs: Real Estate and Self-Directed IRAs
❓ Can I live in a property owned by my SDIRA?
No. Personal use of SDIRA-owned property is strictly prohibited by the IRS.
❓ Can my IRA borrow money to buy real estate?
Yes, but it must be a non-recourse loan, and income from leveraged property may be subject to UBIT.
❓ Who manages the property?
A third-party property manager should handle day-to-day operations. You cannot manage it yourself.
❓ What happens when I sell the property?
All proceeds from the sale go back into the IRA—tax-deferred (Traditional) or tax-free (Roth), depending on the type of account.