Is hiring a real estate IRA custodian a smart move? 

While purchasing precious metals and cryptocurrency for your IRA doesn’t require sophistication, real estate requires a little more due diligence.

Self-directed IRAs already require a custodian for any form of investment, but the question becomes, what role should a real estate IRA custodian play, and how can they help? Should your custodian be a passive or active investor in your retirement account? 

Let’s explore the benefits of hiring a specialized real estate IRA custodian for your SDIRA. 

What Is a Real Estate IRA Custodian?

An IRA custodian is a financial institution that holds your account’s investments safely. In addition to being responsible for the safekeeping of your account, the custodian also ensures that all IRS and government regulations are being followed. 

Also known as trustees, custodians can be crucial for ensuring that your account maintains its tax-free/tax-deferred status. 

Since most IRAs don’t allow you to invest in real estate, you need to open an SDIRA that allows for real estate investments. While custodians are required to open an SDIRA, a real estate IRA custodian merely represents your standard IRA custodian but one who specializes in real estate transactions. 

As most real estate transactions come with special tax privileges and complications, a real estate IRA custodian will help you navigate around these obstacles and ensure proper compliance with the law. 


Consult with Horizon Trust

Benefits of a Real Estate IRA Custodian

  • Help you open an account to invest your retirement funds in real estate. 
  • Navigates tax law and regulations to avoid tax penalties. 
  • Ensures you retain full tax privileges over all of your real estate transactions. 
  • Allows you to invest in multiple types of real estate beyond investment properties. 

What to Look for in a Real Estate IRA Custodian

To begin investing in an IRA using your IRA, you must find the right custodian. Some things to look for when searching for the right real estate IRA custodian include:

  • Specialization in non-publicly traded investments, such as real estate.
  • A long history of managing real estate transactions. 
  • Hands-on consulting or hands-off passive investment guidance (depending on your preference). 
  • Low transaction fees.
  • Full knowledge of all IRS real estate rules and regulations.

What Types of Real Estate Can You Invest in With an SDIRA?

SDIRAs allow you to invest in multiple forms of real estate, including:

  • Raw land: Undeveloped land is ideal when the goal is to sell land to developers at a profit.
  • Single-family homes: The most common type of real estate found in self-directed IRAs, single-family rental properties provide consistent income to help build steady savings.
  • Mobile homes: The strategy for generating income with mobile homes is similar to the strategy when investing in single-family homes.
  • Multi-Family homes: Allowing for several tenants per property, apartment and condo complexes have even greater income potential than single-family homes. However, the appeal must be balanced against the higher maintenance costs.
  • Tax liens: Considered an “indirect” way to invest in real estate, tax liens have value for two different reasons. The first is that they can generate consistent income. The second is that they can actually be resold at a higher value.
  • Mortgage notes: Like tax liens, mortgage notes are considered indirect investments in real estate.
  • Commercial property: IRAs allow for broad investments in commercial property. A commercial real estate investment can be an office building, a carwash business, a restaurant, a billboard, a sports arena, or much more. Commercial property is considered ideal when seeking to generate long-term income.

Why Invest Your IRA in Real Estate?

There are several reasons to invest your IRA in real estate.

One benefit of a real estate-based IRA over traditional IRAs is that real estate can be used to generate rental income over time. Historically, rents rise over time to keep pace with both markets and inflation. 

In addition, rising real estate prices increase the resale value of these investments. 

However, the primary benefit of investing in real estate with an IRA is the tax advantage earned at retirement when you withdraw your earnings from your account. 

Together, investors can combine the combined tax benefits of the 1031 exchange with the tax deferral of a Roth or SDIRA to significantly reduce their tax burden.

SDIRA Real Estate Restrictions

Some prohibited transactions can threaten your money’s tax-deferred status. For instance, the disqualified person rule prevents personal use by the IRA holder. That means a person cannot live in, vacation, or receive direct payments from an IRA-owned property. 

This rule extends to relatives of the IRA holder. 

Under this rule, a disqualified person may not receive any payment or financial benefit for working on the property.

In addition, investors aren’t actually allowed to work on their IRA properties. Instead, you must legally pay an independent person to manage maintenance and repairs. 

Finally, the IRA must pay every expense related to a property. This puts the onus on the investor to ensure the IRA holds enough funds to cover property taxes, maintenance costs, and capital expenditures.

Ways to Invest in Real Estate With an IRA

There are several ways to begin investing in real estate with your IRA.

First, you’ll need to open an SDIRA account. 

You can fund your account through many sources, including a rollover IRAor rollover 401(k) to a self-directed IRA. You can also fund your account with your own cash as long as it doesn’t exceed your required minimum distribution

Remember, real estate investments require high IRA balances. One strategy that many investors use is to put down a small amount before taking advantage of their good credit to obtain low interest rates to leverage their purchase. 

The mindset of this strategy is that the property will generate more income than you’ll pay in interest. 

While rare, banks will sometimes consider loans for IRA real estate transactions. However, this complicates the tax-deferred status of revenue generated from the property. Based on your budget, you can consider investing in:

  • Single-family homes.
  • Multi-family homes.
  • Townhomes.
  • Condos.
  • Apartments.
  • Rehab properties.
  • Co-ops.
  • Commercial properties.
  • Raw land.
  • Tax liens.
  • Deeds and trust deeds.
  • Foreign property.

Your real estate IRA custodian will help you set up the right accounts. In addition, they will steward reporting for all deposits, withdrawals, and balances to the IRS. Of course, knowing the qualities to look for when choosing a person for this all-important role is essential for enjoying the tax benefits owed to you.