How to Use Your Self-Directed IRA to Invest in Real Estate

A self-directed IRA (individual retirement account) is designed to allow account owners to instruct their trustee on how to invest. Investment options include traditional stocks and bonds, along with a much wider range of options including private equity, precious metals, businesses and real estate.

Real estate is unique among all other investments for the favorable tax benefits the asset provides, recurring cash flow and longer-term appreciation, and low correlation with today’s volatile stock markets.

In this article we’ll discuss why a growing number of investors are opting to take charge of their retirement accounts by using a self-directed IRA to invest in real estate.

Why Use a Self-Directed IRA to Invest in Real Estate?

Recent research by the Federal Reserve reports that average retirement plan balances for families in the top half of the nation’s income bracket range from $237,600 to $641,400 (as of 2016). 

With that much money at stake, it’s understandable why savers are becoming increasingly nervous about turning their savings over to a Wall Street firm that may care more about the firm’s profits instead of their client’s.

The recent stock market ups and downs, government bailouts of the 1%, and publicly-owned corporations desperately asking the Fed for cash are just three of the many reasons why investors have begun to question whether stocks really are the good investment they used to be.

Top benefits of investing in real estate with a self-directed IRA (SDIRA):

    • Take charge of your financial future by directing your trustee regarding what types of real estate to invest in and how
    • Protect yourself from gyrations in the stock market that are becoming increasingly difficult to predict
    • Increase the ROI of your IRA with real estate that cash flows and residential property that far outpaces the average rate of inflation
    • Real estate is one of the few investment asset classes that can be seen and touched
  • Real estate investment is one of the best ways to build generational wealth, according to Forbes.




Rules for Using a Self-Directed IRA to Invest in Real Estate

Self-directed IRAs follow some of the same basic rules that apply to other retirement IRAs:

  • Contributions are tax deductible.
  • Early withdrawal penalties apply.
  • Tax deferred benefits accrue.

In addition to these basic guidelines, there are special rules that apply if you’re using a self-directed IRA to invest in real estate:

  1. Real estate purchased by your self-directed IRA can’t be sold to the IRA by you or a related party such as a family member or business entity you have an interest in.
  2. Property in your IRA can’t provide you with an ‘indirect benefit’ such as renting a single-family house held in the IRA to yourself or paying a company you own to lease and manage the real estate.
  3. Real estate holdings must be titled in the name of your IRA and not you, because a self-directed IRA is considered to be a unique entity, separate from yourself.
  4. Property in your self-directed IRA can be purchased using a combination of funds, which means your IRA can be used to participate in joint venture real estate opportunities or partnership investments.
  5. Expenses such as management and leasing fees, utilities, maintenance costs, and property taxes for property owned by the IRA must be paid using funds in the IRA.
  6. Income generated by real estate held in the self-directed IRA must stay within the IRA, and should be paid directly to your IRA.
  7. Income generated by financed rental property held within the IRA must pay UBIT (unrelated business income tax) based on the amount of leverage, because the IRS considers the income to be unrelated debt financed income (UDFI).

However, UBIT doesn’t apply to investment income. Investment income that is exempt from UBIT includes real estate rental income (the percentage that isn’t generated as a result of financing), interest income, capital gain income, and dividend and royalty income from business ownership.

Using a rollover to fund your self-directed IRA

Oftentimes, investors fund their self-directed IRAs using rollovers from other retirement accounts. That’s because there are annual limits for contributing to a self-directed IRA but no limitations on rollover funding:

  • $5,500 per year for people under the age of 50
  • $6,500 per year for people over the age of 50
  • No limit to the size of the rollover, regardless of age




How to Invest in Real Estate with a Self-Directed IRA

The majority of traditional brokerage houses that hold IRAs and 401(k)s aren’t set up to place your funds in non-traditional investments such as real estate. 

Therefore, you’ll need to direct the firm where your retirement account is currently held to transfer the funds to an IRA custodian or trustee that handles self-directed IRAs. 

In addition to selecting a custodian, you’ll need to decide which of the two types of self-directed IRAs for real estate investing is right for you.

  1. Open and place funds in a checkbook IRA account where you directly control the funds in the account.
  2. Place your retirement funds with a custodian specializing in self-directed IRAs who works on your behalf.

Regardless of which type of self-directed IRA you select for investing in real estate, you will still need to make sure to investigate the risk and rewards of each property, ensure that accurate records are maintained, and make sure that if debt is used it is non-recourse, so that all of the funds in your retirement IRA are not at risk.

Choosing a custodian for your self-directed IRA

Custodians for a self-directed IRA must be approved by the IRA and allowed to handle alternative investments. 

The custodian for your IRA holds the assets in your retirement account, reports any early withdrawals to the IRS, and ensures that you don’t contribute more than the allowable annual amount. 

While the IRS requires custodians to follow certain guidelines, self-directed custodians are not required by the IRS to make sure that investments are legitimate or claims of financial performance. Because of this, self-directed IRAs for real estate are usually used by investors who have existing experience with real estate.

As you narrow down your search, be sure to research additional information about the custodian by using the SEC, and other government and state regulatory resources such as the Financial Industry Regulatory Authority (FINRA), and the local chapter of your Better Business Bureau. Your lawyer or financial adviser may be two other good sources for locating an experienced custodian for your self-directed IRA.

Pros and cons of using a SDIRA for real estate investing

Setting up a self-directed IRA to invest in real estate can offer some potentially big advantages, but also a few major drawbacks, depending on your investment objectives and the number of years you have before retirement:

Pros of a self-directed IRA for real estate

  • Invest in all different real estate asset classes, such as office or single-family rentals
  • Assets are real property that is tangible vs. digital stocks and bonds
  • Diversify retirement savings beyond traditional financial products such as ETFs or mutual funds
  • Rental income and capital gains are tax deferred with the potential to create greater returns within your IRA

Cons of a using a self-directed IRA for real estate investing

  • Depreciation expense and interest write-off ‘tax shelter’ benefits are lost because real estate income in a self-directed IRA isn’t subject to tax, so there is no reason reduce the property income within the IRA
  • Investors nearing the age of 70 ½ when minimum distributions are required (RMDs) should remember that because real estate is illiquid, it may be difficult to sell quickly to meet required withdrawals
  • Real estate within a self-directed IRA is heavily regulated, so owning and managing property must be done properly to avoid unintended tax consequences




When to Use a SDIRA for Real Estate Investing

Investors who plan on owning real estate for the long term may find that a self-directed IRA is the perfect retirement vehicle to hold property in:

  • Best for the long-term buy-and-hold strategy
  • Alternative tangible assets vs. electronic ownership of stocks and bonds
  • Low correlation to the stock market and isn’t subject to the wild swings recently seen in the equity markets
  • Easy to diversify a retirement portfolio geographically with real estate
  • Purchase existing property portfolios or participate in joint venture group investments using retirement funds held in a self-directed IRA


Wrapping Up

A self-directed IRA lets you keep total control over the funds in your retirement account, how they are used, and when. 

Investment retirement accounts that are self-directed make it easy to invest in assets other than traditional stocks and bonds, including private equity deals, tax liens, precious metals, and income producing real estate:

  • Real estate can significantly increase the ROI of your IRA with property that historically appreciates well above the rate of inflation.
  • Self-directed IRAs are subject to the same rules that govern traditional IRAs and 401(k)s.
  • Additional special rules for holding real estate in a self-directed IRA include the inability to receive an ‘indirect benefit’ such as renting a single-family home held in the IRA.
  • Income must stay within the IRA, and expenses must be paid from cash held within the IRA, in order to avoid unintended tax consequences.
  • Owning real estate in a self-directed IRA is best for the investor using a long-term buy-and-hold strategy.

If you're interested in opening an IRA to invest in properties listed on Roofstock, check out our partner Advanta IRA.



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Jeff Rohde


Jeff Rohde

Jeff has over 25 years of experience in all segments of the real estate industry including investing, brokerage, residential, commercial, and property management. While his real estate business runs on autopilot, he writes articles to help other investors grow and manage their real estate portfolios.

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