Real Estate Investing with a Self-Directed IRA

Real estate investing with a Self-Directed IRA allows you to diversify your retirement and invest in something you know and love. However, to invest in real estate with your IRA or any retirement account, you need to “self-direct” it. While there are variations in terms of eligibility and contributions for each of these plans, they all allow you to invest in real estate and other alternative investments such as gold, silver, cryptocurrencies, and private placements.

Additionally, you can invest in traditional investments such as stocks, bonds, and mutual funds. Hence, a Self-Directed IRA for real estate is a great way to secure your financial future by diversifying your retirement portfolio. However, owning real estate within an IRA can limit tax benefits like depreciation and interest write-offs, and incur additional costs such as appraisals and maintenance, which can affect the long-term value of the investment.

Introduction to Self-Directed IRAs

A Self-Directed IRA is a type of retirement account that allows investors to take control of their investments and make their own investment decisions. Unlike traditional IRAs, which typically limit investment options to stocks, bonds, and mutual funds, self-directed IRAs offer the flexibility to invest in a wide range of assets, including real estate, precious metals, private placements, and more.

Self-directed IRAs are particularly popular among real estate investors. These accounts enable investors to use their retirement funds to purchase investment properties, such as rental properties, commercial properties, and raw land. By leveraging a Self-Directed IRA for real estate investments, investors can potentially earn rental income, benefit from property appreciation, and enjoy significant tax advantages. Depending on whether the account is a traditional or Roth IRA, these benefits can include tax-deferred growth or even tax-free withdrawals in retirement.

The ability to diversify into real estate and other alternative investments makes self-directed IRAs an attractive option for those looking to enhance their retirement savings and align their investments with their financial goals and risk tolerance.

What is a Self-Directed IRA for Real Estate?

A Self-Directed IRA for real estate, also known as a Real Estate IRA, allows you to invest in any type of asset that is not prohibited by the IRS. The only prohibited transaction that you need to worry about with a real estate investment is the disqualified person’s rule. You (the IRA owner), your spouse, your lineal ascendants and descendants, their spouses, and entities controlled by such persons are not allowed to benefit from the investment. The Self-Directed IRA should be the only thing that receives a benefit, which are the tax advantages of the plan. It is crucial to understand real estate IRA rules to ensure compliance with regulations and guidelines, protecting your retirement savings and maintaining the tax-advantaged status of the account.

The Self-Directed IRA is one of the few choices for those wishing to invest in alternatives. Traditional plans offered by banks and other institutions limit your investment choices. Typically, you can only invest in stocks, bonds, mutual funds, and the like. Therefore, you must first set up a Self-Directed IRA to make real estate investments. Further, when using the right custodian, such as the IRA Financial Trust Company, you can gain checkbook control of your funds by using a Checkbook IRA. You never have to ask IRA Financial when you wish to make an investment. Other custodians require custodial consent for every investment you wish to make. This is bad for real estate investors. Delays in the process could cause you to lose out on a property you wish to purchase.

Benefits of Real Estate Investing with a Self-Directed IRA

Real estate is one of the most popular retirement investments among self-directed investors. One primary reason is that real estate is a tangible asset that produces steady income. For many investors, particularly those with real estate experience, it has been an integral investment in building retirement wealth.

Investing in real estate with a Self-Directed IRA has the following benefits:

• The potential to generate higher returns compared to traditional investment options.
• Helping to diversify your retirement savings. Real estate has traditionally generated high returns. However, with a Self-Directed IRA, you are not limited solely to real estate. You can also invest in other things such as traditional investments, precious metals, and cryptocurrencies.
• Tax-free or tax-deferred growth, depending on if the account is a traditional IRA or a Roth IRA.
• If you have a Self-Directed Roth IRA for real estate, you can move into the property after turning 55 ½ and the account has been open for five years.
• The ability to invest in different types of real estate such as commercial properties, rentals, multifamily homes, land, fractional real estate, and more!
• The variety of real estate assets available for investment, offering flexibility and potential for generating returns while benefiting from tax advantages.
• Depending on the investment you pursue, real estate may provide you with a steady stream of income flowing back to your retirement account.
• You can purchase, sell, and flip properties at your discretion.

Setting Up a Real Estate IRA

Setting up a Real Estate IRA involves several steps, including choosing the right IRA custodian, opening and funding the account, and selecting the investment property. Here are some key considerations to keep in mind when setting up a real estate IRA:

Choosing the Right IRA Custodian

When choosing an IRA custodian, it’s essential to select a reputable and experienced company that specializes in Self-Directed IRAs. The custodian will be responsible for holding and administering the IRA assets, ensuring compliance with IRS rules and regulations, and providing customer support. Look for a custodian that offers competitive fees, flexible investment options, and excellent customer service. A good custodian can make the process of managing your IRA smoother and more efficient, allowing you to focus on your investment strategy.

Opening and Funding the Account

To open a Real Estate IRA, investors will need to complete an application and provide required documentation, such as identification and proof of income. All of this can be done on the IRA Financial app. Once the account is open, investors can fund it with a rollover from an existing IRA or 401(k) plan, or with annual contributions. The account can be funded with cash, and investors can also use non-recourse loans to finance the purchase of investment property. It’s important to ensure that all funding methods comply with IRS regulations to avoid any potential penalties.

What Real Estate Investments Can I Make with a Self-Directed IRA?

Your Self-Directed IRA offers flexibility to hold a wide variety of real estate-related assets, subject to IRS rules. Some common real estate investment types include:

Because the investment is held inside the IRA (not personally), all income, expenses, and capital gains stay within the IRA. You cannot receive direct benefit or personal use of the property, and all day-to-day costs must be paid from IRA funds.

How Does a Self-Directed IRA for Real Estate Work?

The process of investing in real estate with a Self-Directed IRA is relatively simple. First, you need to open an account. You will need to decide whether you want to open a Custodian Controlled Self-Directed IRA or a Checkbook IRA. Generally, individuals buying fractional real estate open a Custodian Controlled IRA due to the low frequency of investments. However, individuals seeking to invest in rentals, fix and flips, or commercial properties tend to open a Checkbook IRA, which gives the investor the freedom to write checks directly from his or her IRA. It is important to have a custodian to manage real estate transactions, ensuring compliance with IRS regulations and facilitating the process efficiently.

Next, the individual will need to select the type of retirement account he or she is seeking to open. A Self-Directed IRA for real estate can be a traditional IRA or a Roth IRA. IRA Financial also allows individuals to open other types of accounts such as a Solo 401(k), SEP IRA, HSA, or Coverdell which can also be used for real estate investments.

After opening your new Self-Directed IRA, you will need to decide how to fund the account. Common ways to fund a Self-Directed IRA include:

• Transferring an existing IRA or 401(k)
• Rolling over existing retirement accounts.
• Making annual contributions. These contributions can be made yearly with contribution limits established by the IRS.

How to Buy Real Estate with Your IRA: Step-by-Step

Investing in real estate through your IRA involves more steps than traditional investing, because of IRS rules and the need for proper structuring. Here’s a step-by-step guide:

1. Set up a Self-Directed IRA aligned with real estate investing
   Choose a custodian, such as IRA Financial, that allows alternative assets (like real estate).
2. Fund the IRA
   Use transfers, rollovers, or contributions to move money into the IRA so it has purchasing capacity.
3. Identify the property
   Do due diligence: location, condition, market rates, zoning, title.
4. Make the purchase in the IRA’s name
   The property deed must read “XYZ IRA, custodian as trustee” — never in your personal name.
5. Use nonrecourse financing if borrowing
   If the IRA needs a loan, it must be nonrecourse. This ensures the lender cannot go after IRA other than the property itself.
6. Close and title properly
   The IRA (or IRA-owned entity) handles all documentation. No personal funds or signatures can be used.
7. Manage and maintain through the IRA
   All expenses—repairs, taxes, insurance—must be paid from the IRA. All income (rent) must flow back into the IRA.
8. Plan for exit or sale
   When selling, profits remain in the IRA; if debt was used, the portion of gain tied to borrowing may trigger UBTI/UDFI.

Ways to Purchase Real Estate with a Self-Directed IRA

Direct Purchases

Retirement investors who want to invest directly in rental properties must have the knowledge to form the following plans:

1. Finding the property
2. Verifying that it is a good deal
3. Financing the property
4. Managing the property

It is crucial to understand IRS rules that prevent self-dealing when investing in a rental property through a self-directed IRA.

Indirect Purchases

Retirement investors who do not feel equipped for the rigors of direct real estate investing can invest indirectly through REITs (real estate investment trusts), crowdfunding websites, private notes, or through a silent partnership such as Seller Financing.

Strategies for Real Estate Investing with a Self-Directed IRA

When using a Self-Directed IRA or Checkbook IRA to make a real estate investment, there are a number of ways you can structure the transaction:

1. Use your Self-Directed IRA funds to make 100% of the investment

If you have enough funds in your Self-Directed IRA to cover the entire real estate purchase (including closing costs, taxes, fees, insurance, etc.) you may make the purchase outright using your IRA. You pay all ongoing expenses relating to the real estate investment out of your IRA bank account. All income or gains relating to your real estate investment must return to the IRA.

For the new real estate investor, it is crucial to explore various real estate assets that align with your industry knowledge and investment goals, as these investments can offer significant advantages, such as tax benefits.

2. Partner with family, friends, and colleagues

If you don’t have sufficient funds in your IRA to make a real estate purchase outright, your Self-Directed IRA can purchase an interest in the property along with a family member who is a non-disqualified person. You can also purchase with a friend or colleague. The investment will not be made into an entity owned by the IRA owner. Instead, it’s invested directly into the property.

For example, your Self-Directed IRA can partner with a non-disqualified family member, friend, or colleague to purchase a piece of property for $150,000. Your Self-Directed IRA can purchase an interest in the property (for example, 50% for $75,000) and your family member, friend, or colleague can purchase the remaining interest (50% for $75,000).

All income or gain from the property will be allocated to the parties in relation to their percentage of ownership in the property. Likewise, all property expenses must be paid in relation to the parties’ percentage of ownership of the property.

Based on the above example, for a $2,000 property tax bill, the Self-Directed IRA will be responsible for 50% of the bill ($1,000). The family member, friend, or colleague is then responsible for the remaining $1,000 (50%).

We’ll discuss more on partnering with family, friends, and colleagues later in this article.

3. Borrow money for your Self-Directed IRA

You may obtain financing through a loan or mortgage to finance a real estate purchase using a Self-Directed IRA. However, you must consider two important points when selecting this option:

Option 1

1. If the IRA purchases real estate and secures a mortgage for the purchase, the loan must be non-recourse. Otherwise, there will be a prohibited transaction. A non-recourse loan only uses the property for collateral. In the event of default, the lender can collect only the property and cannot go after the IRA itself.

Option 2

2. Tax is due on profits from leveraged real estate. If your IRA uses non-recourse debt financing (i.e., a loan) on a real estate investment, some portion of each item of gross income from the property is subject to Unrelated Business Income Tax (UBTI). This is pursuant to Code Section 514. “Debt-financed property” refers to borrowing money to purchase real estate. For example, a leveraged asset is held to produce income.

In such cases, only the income attributable to the financed portion of the property is taxed. Gain on the profit from the sale of the leveraged assets is also UDFI. However, it is not Unrelated Debt Financing Tax (UDFI) if the debt is paid off more than 12 months before the property is sold.

There are some important exceptions from UBTI. Those exceptions relate to the central importance of investment in real estate from the sale of real estate. This includes:

• Dividends
• Interest
• Annuities
• Royalties
• Most rentals from real estate
• Gains/losses

However, rental income the real estate generates that is “debt-financed” loses the exclusion. That portion of the income becomes subject to UBTI. Thus, if the IRA borrows money to finance the purchase of real estate, the portion of the rental income attributable to that debt will be taxable as UBTI.

Let’s assume the average acquisition indebtedness is $50: the average adjusted basis is $100.50 percent of each item of gross income from the property is included in UBTI.

Real Estate IRA Loans & UBTI / UDFI Consequences

Using leverage (a mortgage or loan) inside a real estate IRA is allowed—but comes with critical constraints and tax implications:

• Loan must be nonrecourse: The lender’s only recourse in default is the property itself, not other IRA assets.
• Debt-financed portion triggers UDFI / UBTI: Income or gains tied to the financed portion is subject to Unrelated Debt-Financed Income (UDFI), a subset of UBTI.
• Proportionate allocation: If you borrow 40% of the purchase price, 40% of rental income and gain is considered UBTI.
• 12-month rule for sales: If debt is fully paid off more than 12 months before sale, the gain attributable to that debt is excluded from UDFI.
• Liquidity requirement: Your IRA must hold cash to pay interest, taxes, maintenance, and UBTI tax — you can’t use personal funds.

Example: Your IRA buys a $200,000 rental property with $80,000 nonrecourse debt (40% leverage). If annual gross rent is $12,000, then $4,800 (40%) may be treated as UBTI, subject to tax after expenses.

Why Tax-Free Beats Tax Deductions

For years, real estate investors have focused on tax deductions like depreciation and long-term capital gains treatment when buying property with personal funds. But a Self-Directed Roth IRA offers something even more powerful: the ability to eliminate taxes altogether—both on rental income and future appreciation. By using retirement dollars to buy real estate outright, investors can sidestep capital gains taxes and depreciation recapture, resulting in dramatically higher after-tax profits over time.

While personal ownership provides short-term tax benefits, those gains are often offset by long-term liabilities. With a Self-Directed Roth IRA, your returns grow tax-free, your profits remain untouched, and your wealth compounds without tax drag. Even Traditional IRAs offer tax-deferred growth and potentially lower taxes in retirement. The bottom line: smart investors aren’t just chasing deductions—they’re building permanent, tax-free income for the future.

A Real-World Example

Let’s say you buy a $300,000 rental property with cash. It earns $24,000 in rent annually and costs about $6,000 a year to maintain. You sell it in 10 years for $450,000. You’re in the 35% tax bracket and 20% capital gains bracket.

Scenario A: You use a Self-Directed Roth IRA

• All rental income is tax-free ($18,000/year x 10 = $180,000)
• Appreciation gain of $150,000 is also tax-free
• Total taxes paid: $0
• Total after-tax profit: $330,000

Scenario B: You use personal funds

• After depreciation, you’re taxed on $7,000/year of income
• You pay ~$2,450/year in taxes = $24,500 over 10 years
• When you sell, you owe ~$30,000 in capital gains + ~$27,500 in depreciation recapture
• Total taxes paid: $82,000
• Total after-tax profit: $248,000

Net difference: $82,000 more in your pocket with the Roth IRA

Managing Real Estate Investments

Once the Real Estate IRA is set up and funded, investors will need to manage the investment property to ensure it generates rental income and appreciates in value. Here are some key considerations to keep in mind when managing real estate investments:

Property Management

Property management involves overseeing the day-to-day operations of the investment property, including collecting rent, handling maintenance and repairs, and managing tenant relationships. Investors can hire a property management company to handle these tasks, or they can manage the property themselves. It’s essential to ensure that the property is managed in compliance with IRS rules and regulations, and that all income and expenses are properly reported.

Investors should also consider hiring a real estate attorney to review the property purchase agreement and ensure that the transaction is structured correctly. Additionally, consulting with a tax professional can help ensure that you are taking advantage of all available tax benefits and complying with IRS rules and regulations. By following these steps and considering these key factors, investors can successfully set up and manage a real estate IRA, potentially earning rental income, appreciating in value, and enjoying tax benefits.

UBTI Tax Rates

In most cases, when you use a retirement plan to make investments, you do not generate tax in the case of a Roth IRA, or the taxes will be deferred until a distribution, such as a Traditional or Self-Directed IRA. However, there are certain instances where you will trigger a tax known as the Unrelated Business Taxable Income (UBTI) tax. If you use retirement funds in a real estate transaction that involves a non-recourse loan, you will trigger the UBTI tax. In that case, it’s important to note that a Self-Directed IRA subject to UBTI is taxed at the trust tax rate. This is because an IRA is considered a trust. For 2025, a Self-Directed IRA LLC subject to UBTI is taxed at the following rates:

• $0 – $2,550 = 10% of taxable income
• $2,551 – $9,150 = $255 + 24% of the amount over $2,550
• $9,151 – $12,500 = $1,839 + 35% of the amount over $9,150
• $12,501 + = $3,011.50 + 37% of the amount over $12,500

Partnering with a Family Member in a Real Estate Transaction – Prohibited Transaction?

Partnering with a family member is likely not prohibited if the transaction is structured correctly. Investing in an investment entity with a family member and investing in an investment property directly are two different transaction structures that impact whether the transaction will be prohibited under Code Section 4975.

The different tax treatment is based on who currently owns the investment. Using a Self-Directed IRA to invest in an entity that a family member owns (and is a disqualified person) will likely be treated as a prohibited transaction.

However, partnering with a family member that is a non-disqualified person directly into an investment property is likely not a prohibited transaction. It’s important to note that if you, a family member, or another disqualified person already owns a property, then investing in that property with your Self-Directed IRA would be prohibited.

What Disqualifies Real Estate Held in an IRA?

Not all real estate strategies are allowed inside an IRA. Be careful to avoid disqualified/prohibited transactions, which can void the tax benefits.

Some key disqualifying activities include:

• Personal use or occupancy: You or any disqualified person (spouse, ancestors, descendants) cannot live in or use the property.
• Selling to or buying from you or disqualified persons: The IRA cannot transact with the account holder or close family.
• Direct benefits to disqualified persons: No lease, favorable terms, or improvements that benefit disqualified persons.
• Commingling funds: You cannot mix personal money with IRA property; all expenses and income must flow through the IRA.
• Unauthorized improvements with personal funds: You can’t personally pay for repairs or improve the property with personal funds; IRA must cover these.

If a prohibited transaction is declared by the IRS, the IRA’s real estate investment could be disqualified, causing taxes and penalties.

Common Pitfalls to Avoid in Real Estate IRA Investing

While investing in real estate via your IRA offers compelling tax benefits, it also comes with traps. Watch out for these common mistakes:

• Lack of proper planning at sale: Timing debt payoffs and understanding UDFI implications on gains is essential.
• Underestimating maintenance or vacancy costs: The IRA must cover all property expenses—even in vacancy periods.
• Insufficient liquidity: Without cash in the IRA, you may be forced to liquidate assets for taxes or repairs.
• Triggering UBTI/UDFI unexpectedly: Using leverage or active business operations without planning can cause tax surprises.
• Violation of prohibited transaction rules: Personal benefit, commingling, or dealing with disqualified persons can cause severe penalties.
• Poor due diligence: Not checking title, zoning, liens, or property condition is risky—especially since the IRA is the owner.
• Failure to title properly: The deed must always list the IRA or IRA-owned entity—if titled incorrectly, you risk personal liability or disqualification.

Conclusion

Investing in real estate with a Self-Directed IRA gives you the power to diversify your portfolio, take control of your retirement, and invest in assets you understand best. Whether you’re drawn to rental properties, commercial buildings, or raw land, a Real Estate IRA allows your investments to grow tax-deferred—or even tax-free—while staying within IRS rules.

While real estate inside an IRA offers tremendous long-term potential, it also requires careful planning and strict compliance. Understanding prohibited transactions, UBTI, and the role of a qualified custodian ensures that your investments remain protected and fully tax-advantaged.

At IRA Financial, we’ve helped thousands of investors unlock the flexibility and tax benefits of self-direction. With the right structure—such as checkbook control through an IRA LLC—you can act quickly on opportunities, eliminate unnecessary custodial delays, and build lasting wealth on your terms.

Ready to Put Your IRA to Work in Real Estate?

Real estate remains the most common investment in a Self-Directed IRA. At IRA Financial, our experts are here to help. We have helped over 24,000 clients take back control of their retirement. However, investing in real estate can be complicated.

👉 Schedule a Free Consultation to discuss your real estate investing goals with an expert.
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