Using a Self-Directed IRA for Real Estate Investments – What You Need to Know

Most financial experts advise diversifying investment portfolios to reduce risk and boost your savings for retirement. However, most retirement accounts limit your investment options and only allow you to hold a mix of traditional investments, such as bonds, stocks, mutual funds, CDs, and ETFs. But, a self-directed IRA allows you to expand your horizons and lets you invest in real estate, precious metals, notes, tax lien certificates, private placements, and many more options.

What Is a Self-Directed IRA?

A self-directed IRA is a traditional IRA or Roth IRA, but it’s unique because it allows a wide range of investments. With a self-directed IRA, you can invest in real estate, notes, private placements, tax lien certificates, etc. Since a self-directed IRA is one of the best options for investing in real estate and real estate-related assets with tax benefits, they are also called Real Estate IRAs.

What Real Estate Investments Can You Make With a Self-Directed IRA?

You can make the following domestic or foreign real estate-related investments you can make with your self-directed IRA:

  • Residential homes
  • Raw land
  • Apartments
  • Commercial property
  • Duplexes
  • Mobile homes
  • Condos/townhomes
  • Real estate notes
  • Tax liens certificates
  • Real estate purchase options
  • Tax deeds

It’s easy to invest in real estate with an IRA LLC. After deciding on the property, you simply use a debit card, wire the funds, or write a check. It’s just like buying a property personally with the added benefit of tax deferral.

Self-Directed IRA: The Right IRA for Buying Investment Property

A self-directed IRA is the right IRA for buying real estate. In a self-directed IRA, the financial institution, the IRA custodian, or the company offers or accepts alternative investments.

A self-directed IRA is independent of any bank, brokerage, or investment company that would make decisions for you. However, to own property through your IRA, you will need a custodian. An IRA custodian is an entity that specializes in self-directed accounts and manages the transaction, financial reporting, and the associated paperwork.

Real estate investments are complex, and everything has to go through the custodian to keep you from violating the strict rules governing them. In a nutshell, a custodian’s job is to handle the back-office work for a fee. It won’t advise you on how to best structure your holdings.

Another fact you need to keep in mind is that you and your IRA are two separate entities. Your IRA is the owner of the property – not you.

If you violate any of the rules while buying the real estate with your IRA, your IRA can get disqualified. When this happens, all the funds immediately become taxable.

What Is Yours and What Isn’t in Real Estate Investments Using Self-Directed IRA

The property you are buying with a self-directed IRA must be purely for investment purposes; it’s not for personal use. You cannot use it as a second home, vacation home, an office for your business or a place for your children to stay. These rules apply to you and the people the IRS considers as “disqualified.”

The IRS considers the following as a disqualified person:

  • Your spouse
  • Your children and their spouses, grandchildren, and great-grandchildren
  • Your parents, grandparents, and great-grandparents
  • Any entity that owns more than 50% of the property
  • Service providers of your IRA

The IRS doesn’t allow your IRA to purchase the property from any of these disqualified people. If you do, it’s called a self-dealing transaction. The IRA also cannot purchase property that you already own.

Self-Directed IRAs Help You Invest for Retirement

Employer-sponsored 401(k)s and other retirement plans do not give you the freedom to choose where you want to invest your fund. This reduces your control over your returns. Self-directed IRAs allow you to make real estate investment that helps you earn greater returns and build wealth to live comfortably in retirement through the power of compounding interest

Key Takeaways

  • You’ll need a self-directed IRA to hold real estate in an IRA.
  • The property you buy must be strictly for investment purposes and cannot be used by you or your family.
  • Buying real estate within an IRA is usually a cash transaction, and all the expenses associated with the property ownership has to be paid by the IRA.

In Conclusion

Holding real estate in your IRA helps you diversify your portfolio and provide you with great returns in retirement. That said, it’s a tricky process laden with many red flags and tax issues. Talk to your financial advisor about how you can take advantage of it without violating the rules.

Author Bio:

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He regularly writes for blogs at MoneyForLunch, Biggerpocket, SocialMediaToday, NuWireInvestor & his own blog for Self Directed Retirement Plans. If you need help and guidance with traditional or alternative investments, email him at or visit

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