IRA real estate investing has become one of the most popular alternatives for retirement savers seeking to diversify beyond the stock market. Through a Self-Directed IRA (SDIRA), investors can legally own real estate inside their retirement account while preserving the powerful tax advantages associated with Traditional and Roth IRAs. However, IRA property investing carries responsibilities and compliance obligations that do not apply to personally owned real estate. The difference between success and disaster is often rooted in the investor’s level of due diligence.

Congress Has Long Allowed IRAs to Invest in Real Estate

Contrary to popular belief, the IRS does not prohibit real estate or alternative assets inside IRAs. In fact, when Congress created IRAs under ERISA in 1974, lawmakers deliberately allowed retirement accounts to invest in a wide range of assets. Outside of life insurance and collectibles, real estate and private investments have always been permitted. The reason most Americans do not associate IRAs with real estate is simple: traditional brokerages and banks are not designed or incentivized to hold alternative assets. Their systems support securities, not property deeds. This structural reality gave rise to the Self-Directed IRA industry.

Evaluating the Investment Before You Buy

Before acquiring property through an IRA, investors must thoroughly assess the investment just as they would outside a retirement account. This includes evaluating the appraised value, neighborhood trends, rent potential, expense ratios, property condition, and long-term appreciation prospects. Income projections should be realistic, not promotional.

If a third party is involved in presenting the opportunity, investors should also perform background checks on any promoter or sponsor. Reviewing a sponsor’s track record, prior project performance, and professional reputation is essential. Promises of guaranteed returns or aggressive appreciation should raise red flags, especially when retirement funds are at stake. A proper investment decision should be supported by market data and conservative assumptions, not pitch decks.

Investment structure is another important consideration. Investors must understand how ownership will be titled, whether an IRA-owned LLC will be used, who controls day-to-day decisions, and how profits and expenses will be allocated. Poor structuring not only creates legal and tax risk, it can make future transactions more complicated and costly.

Understanding the IRS Prohibited Transaction Rules

The most overlooked risk in IRA real estate investing comes from misinformation about the IRS prohibited transaction rules under Internal Revenue Code Section 4975. These rules exist to prevent a retirement account owner from gaining personal benefit from IRA investments prior to retirement.

In practical terms, an IRA owner may not occupy or use property owned by their IRA for any reason. A vacation home purchased by an IRA may not be used by the account holder, even temporarily. The property also may not be rented to the IRA owner, their spouse, parents, children, or grandchildren. Doing so invalidates the firearm safety net of tax deferral and exposes the entire IRA to taxation.

The IRA owner may also not perform maintenance, renovations, or physical labor on the property. Acting as property manager, painter, contractor, or handyman, even without compensation, is prohibited. While investors may guide investment decisions and hire third-party professionals, they must not provide services to the IRA.

All money movement related to the property must remain within the retirement account or IRA-owned LLC. Payment of expenses using personal funds, or deposit of income into personal accounts, is a compliance violation that can trigger full IRA disqualification.

UBIT: How Taxes Can Apply to IRA-Owned Real Estate

Most IRA-owned property produces tax-deferred or tax-free income. However, Unrelated Business Income Tax (UBIT) can arise if certain conditions exist. The most common example for real estate investors involves the use of debt financing.

If an IRA uses a nonrecourse loan to acquire property, the portion of income and gains attributed to the loan may be subject to tax under the UDFI (Unrelated Debt-Financed Income) rules. In some circumstances, the tax rate may approach 37%. Many investors enter financing transactions without fully understanding this tax exposure.

While leverage may increase purchasing power, it can also introduce a tax drag that reduces overall returns. This underscores the importance of reviewing leverage strategy before closing, not afterward, and doing so through a qualified professional who understands UBIT.

Why the Right Self-Directed RA Custodian Is Critical

A Self-Directed IRA custodian is far more than a placeholder for assets. The right custodian provides education, compliance support, document review, tax reporting, and structural guidance that helps prevent costly mistakes.

Not all SDIRA custodians offer real estate expertise. Many serve only as administrators and offer little technical insight. The investor bears full responsibility for errors, even when the custodian is silent.

Working with an experienced custodian gives investors access to in-house compliance professionals who understand real estate structure, prohibited transaction rules, and UBIT reporting requirements. This guidance is crucial when setting up IRA-owned LLCs, financing real estate, or investing in partnerships.

Why IRA Financial Is the Leader in Real Estate IRA Due Diligence

IRA Financial is recognized as a national leader in SDIRA real estate investing, working with more than 27,000 clients and overseeing over $5 billion in assets. Founded by Adam Bergman, a leading tax attorney and self-directed retirement authority, the firm combines technical expertise with hands-on investor support.

Adam Bergman has authored nine books on self-directed retirement strategies and two books focused exclusively on checkbook control IRAs. His legal experience underpins IRA Financial’s compliance-first philosophy.

What truly sets IRA Financial apart is its ability to assist investors throughout the entire process, not just at setup. The firm supports investors with transaction guidance, regulatory consulting, IRS reporting, UBIT filings, and entity-level tax returns where applicable.

Conclusion

Investing in real estate through a Self-Directed IRA offers tremendous opportunity, but also real risk if the rules are misunderstood or ignored. Successful IRA real estate investing requires diligence, discipline, and the right professional partners.

With comprehensive services, unmatched expertise, and a foundation rooted in tax law, IRA Financial remains the go-to custodian for investors who want to build retirement wealth through real estate responsibly and compliantly.

Contact us or schedule a consultation to get started.