Using your IRA to buy real estate can help you diversify your retirement portfolio while benefiting from passive income and hedging against the market volatility accompanying common assets like stocks and mutual funds.

Still, real estate investments and asset management can be complex. To truly reap the rewards, you must closely understand and follow IRS regulations, stay actively involved in your investment, and work with a reputable and experienced custodian.

To ensure you’re set up for success, keep these 15 essential facts about using a self-directed IRA to invest in real estate.

1. You cannot use your IRA to buy personal property.

When purchasing property with your IRA, you must be careful who you buy from., and that includes yourself. You cannot use your IRA to buy anything you own. This is considered self-dealing. You cannot benefit from your IRA until you reach retirement age and start making withdrawals.

2. You cannot use your IRA to purchase property for disqualified individuals.

In the same vein as the first tip, you cannot buy a house for or rent to anyone considered a “disqualified individual.” This group includes your spouse, children, grandchildren, grandparents, parents, and anyone directly involved with your IRA. No one who stands to benefit from your IRA can use the property.

3. Your IRA owns the property.

When you purchase property using your self-directed account, your IRA owns that property. When you buy up your asset, it will be placed under your IRA.

All the documentation should be in the IRA’s name. Going forward, everything for that property should be handled by your custodian.

4. You cannot personally use your IRA-held property.

Purchasing real estate for your retirement fund is not as simple as buying your vacation home and renting it out when you aren’t kicking back. Account holders are not allowed to use any property owned by their IRA.

Just like when you cannot buy your own property, you cannot use it. Whether you purchase an office building, a rental, or a vacation home, you cannot use your IRA-owned property.

5. All funding for the property should be through your IRA.

In addition to not being able to use your IRA-owned property, you cannot use your personal funds for upkeep. All maintenance, alterations, and fees should be paid through your IRA.

Likewise, all funds accrued by your property should go back into your IRA. The cash should flow through your self-directed account.

6. You don’t need 100% of your funds through your IRA to buy property.

If you are interested in buying property for your retirement fund but don’t have enough stored in your IRA, you can take a non-recourse loan to foot the bill. You can also partner with others, but it must be done correctly.

Consult a financial advisor if you are considering this option to make sure everything is in order.

7. Taking out a loan may result in UBIT.

If you don’t have the funds to purchase property with your IRA, it is possible to use a non-recourse loan to buy it. However, should you plan to go this route, using a non-recourse loan will result in unrelated business income tax – or UBIT. This tax will be paid from the IRA, significantly lowering your income.

8. You must outsource improvements to IRA-owned property.

To stay compliant with IRS rules, you cannot personally perform repairs, renovations, or upgrades on property owned by your IRA, even if you’re a licensed contractor. All improvements must be handled by independent professionals paid directly through your IRA.

Doing the work yourself could be considered a prohibited transaction and jeopardize the tax-advantaged status of your account.

9. You can’t use a traditional mortgage to finance the property.

When using an IRA to buy real estate, traditional mortgages are off-limits. The IRS prohibits you from personally guaranteeing any loan for an IRA-owned property, which rules out conventional financing. Instead, you must use a non-recourse loan, a special type of mortgage that limits the lender’s claim solely to the property in the event of default.

These loans typically require a larger down payment and have higher interest rates, but they’re the only legal financing option for buying real estate with a self-directed IRA.

10. Tax Treatment Depends on Property.

Unlike personal investments, IRA-owned real estate doesn’t allow you to claim depreciation or deduct losses on your personal returns. Additionally, if your IRA uses a non-recourse loan to buy a property, the income generated may be subject to UBIT. Continually evaluate the tax treatment of rental income and financing implications before investing.

11. The market value fluctuates.

The real estate market can be finicky. Before making a purchase, it’s essential to watch the market values, research different vacant areas, and think about the property you select.

Consider the taxes, neighborhood, parking, and the economy. While you can’t be 100% certain about your research, you should have a grasp of the market value of what you’re buying.

12. You should have an SDIRA custodian with real estate experience.

With any self-directed account, the IRS requires that the account be held by an approved IRA custodian who oversees your retirement fund. As you search for the best custodian for your investment goals, prioritize those with real estate experience.

The same is true for any alternative asset. Selecting a specialist to help your investments grow is better.

13. You don’t have to hold on to your real estate.

Real estate held in a self-directed IRA doesn’t have to be a long-term investment. While property isn’t as liquid as stocks or mutual funds, you can still flip a home within your IRA to generate a profit, as long as all proceeds stay within the account.

Keep in mind that flipping real estate through an IRA can have cost consequences and requires strict adherence to IRS rules regarding SDIRA-held assets. For instance, you’ll need to fund all renovations through your IRA and work with third-party contractors.

However, if managed correctly, short-term property investments can deliver strong returns and help grow your retirement savings more aggressively.

14. You can manage properties with an LLC.

If you want to avoid the middleman and truly be in charge of your IRA assets, you can open an LLC to purchase your assets. By using your IRA to open the LLC, you can give yourself checkbook control and skip the multiple visits to the custodian.

Remember, you are still required to have a certified custodian oversee the account. This allows you easier access to your funds and a few other benefits.

15. Real estate investments require significant capital

Real estate can be costly, and you can’t combine your personal funds with those in your SDIRA. As such, you generally need to have a reasonable amount of money saved, take out a non-recourse loan, or split the cost with another SDIRA owner(s).

In addition, it’s important to factor in additional or ongoing costs, such as maintenance and upkeep, upgrades and renovations, taxes, and management fees, when applicable — all of which must come from your SDIRA account.

Is Using an IRA to Buy Real Estate Right for You?

Investing in real estate through a self-directed IRA can be a smart way to diversify your retirement portfolio and build long-term wealth, but it’s not a one-size-fits-all strategy. It comes with unique rules, responsibilities, and risks that require careful consideration.

Before moving forward, take time to complete due diligence. Research the rules, evaluate your financial goals, and speak with qualified financial and tax experts to ensure you’re making informed decisions.

Ready to explore whether using your IRA to buy real estate is right for your retirement plan? Contact one of our specialists today to get personalized guidance and build a strategy that works for you.

FAQs

Can I buy real estate with a Self-Directed IRA?

Yes. A Self-Directed IRA allows you to invest in a wide range of alternative assets, including residential, commercial, raw land, multi-family properties, and more. The property is owned by the IRA, not you personally.

Who pays expenses related to the property?

All expenses, including maintenance, taxes, insurance, repairs, must be paid from the SDIRA account. You cannot pay out-of-pocket, or it risks disqualifying the IRA.

Who receives the rental income from SDIRA-owned property?

All rental income must flow directly back to the IRA, not to you personally. This income is tax-deferred (or tax-free in a Roth SDIRA).