Investing in real estate using a Self-Directed IRA (SDIRA) is a powerful way to grow retirement savings through alternative assets. However, the IRS has strict rules about how these investments must be handled. In this guide, we break down everything you need to know about Self-Directed IRA real estate rules, helping you avoid costly mistakes and stay compliant while maximizing returns.
📌 What is a Self-Directed IRA?
A Self-Directed IRA is a type of Individual Retirement Account that allows you to invest in a broader range of assets beyond traditional stocks and bonds — including real estate, private placements, cryptocurrency, precious metals, and more.
Key Difference: Unlike standard IRAs, SDIRAs require a custodian or administrator who handles the paperwork and ensures IRS compliance, but investment decisions are made by the account holder.
🏠 Why Invest in Real Estate with a Self-Directed IRA?
✅ Benefits
- Tax-deferred or tax-free growth (depending on Traditional vs Roth SDIRA)
- Portfolio diversification beyond Wall Street
- Potential for higher returns with rental income and property appreciation
- Tangible asset ownership
❗ Risks
- IRS compliance is strict
- Illiquid investment
- No personal use of the property
- No access to traditional financing
📜 Self-Directed IRA Real Estate Rules: What You MUST Know
1. No Personal Use of the Property
You cannot live in, rent to, or use the property owned by your SDIRA, even for a single night.
Prohibited Usage:
- Your vacation home
- Housing for your children or parents
- Office space for your business
This rule applies even if you pay market rent — any personal benefit is a prohibited transaction.
2. No Dealing with Disqualified Persons
The IRS defines “disqualified persons” as people who cannot benefit from or transact with your IRA. This includes:
| Relationship | Disqualified? |
|---|---|
| You (the IRA holder) | ✅ Yes |
| Spouse | ✅ Yes |
| Parents & grandparents | ✅ Yes |
| Children & grandchildren | ✅ Yes |
| Business you own 50%+ of | ✅ Yes |
| Siblings | ❌ No |
| Friends | ❌ No |
Example: You cannot sell a personally owned property to your IRA or vice versa.
3. All Expenses Must Be Paid by the IRA
All property-related expenses — maintenance, taxes, insurance, HOA dues, repairs — must be paid from your IRA funds. You cannot pay from your personal account.
4. All Income Must Return to the IRA
Any rental income, sale proceeds, or gains must flow directly into the IRA — not to your personal account.
5. No Sweat Equity Allowed
You cannot personally perform work on the property. That includes:
- Painting
- Landscaping
- Repairs
- Renovations
Reason: Your labor is considered a benefit, which the IRS disallows.
Instead, you must hire independent third parties and pay them through the IRA.
6. Title Must Be in the Name of the IRA
You don’t own the property — your IRA does.
Title Example:
“XYZ Trust Company FBO John Doe IRA”
If the title is in your personal name, the IRS may disqualify the entire IRA.
🏗️ What Real Estate Can You Buy in an SDIRA?
| Type of Property | Allowed? |
|---|---|
| Residential rental property | ✅ Yes |
| Commercial property | ✅ Yes |
| Land (undeveloped) | ✅ Yes |
| Foreign real estate | ✅ Yes |
| Real estate investment trusts | ✅ Yes |
| Vacation homes for personal use | ❌ No |
| Property owned by relatives | ❌ No |
🔄 How to Buy Real Estate with an SDIRA: Step-by-Step
- Open an SDIRA account with an IRS-approved custodian
- Fund the account via transfer, rollover, or contribution
- Identify the property you want to buy
- Submit a “Buy Direction Letter” to your custodian
- Custodian executes the purchase in the name of your IRA
- IRA pays all purchase costs and receives the deed
💰 Financing Real Estate in an SDIRA: Is It Possible?
Yes — but with conditions.
❗You Can’t Use a Personal Loan
You cannot personally guarantee a loan or use traditional financing.
✅ What’s Allowed: Non-Recourse Loans
A non-recourse loan is the only type allowed. The loan is secured only by the property and not by your personal credit.
Caution: If your IRA uses debt, the income from that property may be subject to Unrelated Business Income Tax (UBIT).
📊 Tax Considerations for SDIRA Real Estate
| Tax Aspect | Traditional SDIRA | Roth SDIRA |
|---|---|---|
| Contributions | Pre-tax | Post-tax |
| Rental Income | Tax-deferred | Tax-free |
| Capital Gains | Tax-deferred | Tax-free |
| UBIT on leveraged property | Yes | Yes |
| RMDs at age 73 | Yes | No |
🧾 UBIT (Unrelated Business Income Tax)
If your IRA earns income from leveraged real estate, a portion of the income may be taxed. This applies to:
- Rental income from mortgaged property
- Sale of property purchased with debt
Rate: UBIT rates can be as high as 37%, so plan financing carefully.
⚠️ Penalties for Rule Violations
Violating SDIRA rules — even unintentionally — can disqualify the IRA, leading to:
- Immediate distribution of the entire account
- Full tax on distributed value
- 10% early withdrawal penalty (if under 59½)
- Additional IRS penalties
Example: If you personally fix a plumbing issue in the rental, the IRS can disqualify your entire IRA.
🧠 Best Practices for SDIRA Real Estate Investors
| Tip | Why It Matters |
|---|---|
| Work with an experienced custodian | They ensure proper recordkeeping |
| Use a CPA or IRA tax expert | Avoid UBIT and disqualification traps |
| Keep funds in reserve in your IRA | To cover property expenses |
| Perform due diligence on all properties | The IRA bears all risk |
| Maintain separate accounting | Mixing personal and IRA funds is prohibited |
🧾 Example Case Study
Investor: Sarah, age 45
IRA Balance: $200,000
Property Purchased: Duplex for $180,000
Rental Income: $2,000/month
Expenses: $400/month
Annual ROI: Approx. 10.7% (net of expenses, tax-deferred)
Sarah ensures all rent goes to the IRA and all repairs are handled by third-party vendors. She avoids UBIT by using no leverage.
🧰 Recommended SDIRA Custodians for Real Estate
| Company | Key Feature |
|---|---|
| Equity Trust | Real estate-focused, strong support |
| Entrust Group | Educational resources |
| IRA Financial | Mobile app + real estate tools |
| Madison Trust Company | Low fees, easy setup |
🏁 Conclusion
Using a Self-Directed IRA to invest in real estate offers powerful tax advantages, but it comes with strict rules. The IRS has zero tolerance for prohibited transactions, and even small mistakes can trigger massive penalties.
If you’re planning to use your SDIRA for real estate:
- Work with a knowledgeable custodian
- Keep personal and IRA funds separate
- Never use or benefit from the property
- Understand UBIT implications
Done right, SDIRA real estate investing can significantly enhance your retirement portfolio while keeping you fully compliant.