Buying Real Estate with IRA – Everything You Need to Know

A Self-Directed IRA is a tax-deferred individual retirement account. You can use it to invest your retirement funds in alternative assets like real estate. You get the same tax benefits as other IRAs, however, you will have more flexibility while choosing your investment.

7 Important Rules to Know

1. The IRA Cannot Purchase Property Owned by You or a Disqualified Person

Real estate IRA rules don’t allow your self-directed IRA to buy or sell property to any disqualified person, including yourself.

2. You Cannot Have ‘Indirect Benefits’

IRA is not intended to benefit you in the present day.

If your IRA engages in a transaction that benefits you or a disqualified person today, it would be considered as an indirect benefit.

3. IRA Investments Must be Uniquely Titled

The investment should be titled in the name of your IRA, not to you personally.

If all the documents related to the investment are titled correctly, there would be no delays.

4. Self-Directed IRA Real Estate Can be purchased without 100% Funding from Your IRA

Apart from paying the full amount from the account to purchase a property, you can:

  • Use undivided interest
  • Partner with other people
  • Finance an investment with IRA but ensure it is structured properly

5. UBIT Applies if You Use Financing

You can use financing to purchase real estate through your self-directed IRA. Ensure that the loan is non-recourse.

If you do use financing, unrelated business income tax (UBIT) will apply.

6. Expenses Must Be Paid from Your IRA

All expenses related to property owned by your self-directed IRA must be paid from your IRA. These expenses include property taxes, maintenance fee, general bills, improvement fees, etc.

7. Real Estate IRA Income Must Return to Your IRA

Income generated by the property owned by your self-directed IRA must be paid into your IRA.

5 Things to Consider Before Buying Self-Directed IRA Real Estate

1. Research

When you are buying real estate with Self-Directed IRA, do thorough research and due diligence. Be familiar with specific real estate asset that your IRA will purchase. Check its locality and know about all the costs involved.

2. Buy What You Can Afford

Real estate involves ongoing costs like taxes and repairs.

Make sure that you are buying a real estate asset that your IRA can afford. Keep a reserve of at least 5-10% of the value of the asset, in case of an emergency.

3. Use IRA Custodian Options

Generally, financial institutes and traditional banks don’t encourage IRA holders to buy real estate with their IRA.

However, you can consider special self-directed IRA custodians as they allow their clients to make alternative asset investments, including real estate.

The ‘Custodian Controlled’ self-directed IRA option is common amongst IRA investors who want to make real estate investments that don’t involve high frequency of transactions.

This may include raw land or an investment fund.

4. Understand the IRS Prohibited Transaction Rules

The IRS Code prohibits disqualified persons from engaging in certain types of transactions.

As long as the self-directed IRA does not purchase collectibles, life insurance or any transaction benefiting you, you can make the investment.

5. Be Aware of Taxations

As an IRA holder, you cannot personally guarantee a loan associated with your IRA.

But if you can secure a non-recourse loan for buying real estate with IRA, UBIT rules could apply. Therefore, check all the options so that you don’t get stuck with tax issues.


How to Invest in Self-Directed IRA Real Estate

  • Purchase the Property

If you are interested in a property, your custodian will make an offer on your behalf to the seller. All the negotiations have to be carried out through the custodian.

The purchase process and timeline of IRA real estate investing are similar to a traditional real estate transaction. The only difference is that the funds must be transferred through the IRA account. Personal funds are off-limits.


  • Manage the Property

After you purchase the property, you need to find tenants to rent it. You can either purchase a turnkey property with existing tenants or a vacant property.

Once you find tenants for your property, the custodian will hire a property management company. The custodian will collect the rent payments in your IRA LLC’s name. If there are any additional payments like property taxes, loan payments and maintenance fees, the funds will be taken out of your self-directed IRA account.

Don’t use personal funds in the transaction. Remember – you nor any family member can live in the property. It would be considered as indirect benefit, which is against self-redirected IRA real estate rules.


  • Sell the Property

You cannot sell your property before the age of 59½ without early withdrawal penalties.

Once you turn 59½  years, you can sell the property. You won’t have to pay any capital gains tax since the property was held in the self-directed IRA.

When you start taking distributions, you can enjoy the tax benefits because they will either be tax-free or taxed at the current tax rate. The current tax rate will be lower than the tax rate you had while earning rental income.

Using IRA to buy real estate is a good investment option. You get more control over the investment opportunities for your retirement. Remember to abide by the IRS guidelines while filing paperwork and maintaining records.



Author Bio: Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as, SAP, MoneyForLunch, BiggerPockets, SocialMediaToday, and NuWireInvestor.

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