Did you know that your IRA can own Real Estate? Real estate investments are the most common asset for self-directed accounts at Directed IRA which can include single family rentals, fix & flips, private funds in multi-family or commercial real estate, private REITs , notes secured by real estate, and more.
Yes, your IRA can invest in real estate. It can own single-family rental properties, purchase and flip homes for profit, lend money to real estate investors, or even hold options and contracts on properties. Your IRA can also invest in small private LLCs that own residential or commercial properties alongside other investors or IRAs. Additionally, it can participate in syndications or real estate funds as an investor.
Contrary to common belief, IRAs have always been allowed to invest in real estate. With over $15 trillion held in IRA accounts across the U.S., this powerful tool is often overlooked for real estate investments like rentals, flips, commercial properties, and more.
At this point, many people ask, “Why haven’t I heard about this before?” The answer lies in the major providers of IRAs. Most brokerage and insurance firms find real estate investments “administratively unfeasible” because managing properties requires more effort than handling publicly traded assets like stocks, mutual funds, or REITs. Since these firms typically restrict their IRA offerings to the products they sell—such as stocks, mutual funds, or annuities—the option to invest in real estate has remained underutilized.
While it’s always been possible to own real estate in an IRA, the limited number of IRA custodians who allow it has kept this opportunity out of the spotlight. However, for savvy investors who know and love real estate, using an IRA for real estate is a practical and powerful way to diversify and grow wealth.
Download our Beginner’s Guide: Investing in Real Estate in Your IRA
Self-directed IRAs offer a range of opportunities for real estate investments. They can hold single-family rental properties or properties being flipped for profit. Additionally, IRAs can invest in small private LLCs that own commercial or multifamily properties alongside other individuals or IRAs. They can also own real estate options or act as private lenders, offering secured loans to other real estate investors, including hard money loans.
However, it’s important to note that IRAs cannot be used to purchase properties for personal use or for use by certain disqualified family members. All assets held within the IRA must strictly serve investment purposes.
In short, self-directed IRAs can own virtually any type of real estate investment, as long as it is held solely for investment purposes.
Most Common Self-Directed Real Estate Investments
Self-directed retirement account providers like Directed IRA offer a variety of self-directed account options, including Roth IRAs, Traditional IRAs, Checkbook IRA/LLCs, HSAs, and more. These accounts empower investors to choose assets that align with their financial goals, such as real estate, and take charge of their retirement strategy.
All accounts offered at Directed IRA can be invested into real estate—making self-directed IRAs (SDIRAs) a highly underutilized tool in real estate investing. Many investors don’t realize that their retirement accounts can be leveraged to enter the real estate market, unlocking new opportunities for growth and diversification.
To invest your IRA in real estate, you’ll need to set up a “self-directed IRA” and transfer funds from your current IRA provider or prior employer’s 401(k) into your new account. You can also begin with new annual contributions, but depending on the real estate investment it may take a while to accumulate enough funds to make a real estate investment from your self-directed account.
A self-directed IRA allows you to invest in a wide range of assets permitted by law. While real estate is the most popular choice, these accounts can also be used to invest in startups, private equity funds, venture capital funds, precious metals, and even cryptocurrency.
Companies, such as Directed IRA, specialize in offering self-directed IRA accounts, making it easier to diversify your portfolio and explore alternative investments.
Self-Directed IRA Investment Process With Real Estate
account, it’s crucial to understand the prohibited transaction rules outlined in IRC § 4975. These regulations don’t limit the types of investments your account can hold but rather define whom your account is allowed to transact with. At their core, these rules are designed to prevent your retirement account from engaging in transactions with individuals who are considered “disqualified persons.”
Who is a disqualified person? A “disqualified person” includes the account owner, their spouse, their children and their spouse, parents, and any LLC or other company owned or controlled by 50% or more by these disqualified persons. For instance:
• : Your retirement account cannot purchase a rental property owned by your father, as he is a disqualified person.
: Your account cannot purchase a property from a third party and then rent it to your child, as your child is also disqualified.
: Your account buy real estate from your cousin, a friend, your sister, or a third party, as they are not considered disqualified persons under these rules.
When your account is investing and transacting with unrelated people (not family or disqualified) you don’t need to worry about these rules. But when you or any disqualified person get involved in the investment or on any side of a transaction with your account these rules become important and will likely result in a prohibited transaction. In that instance, you’ll want to seek legal advice as to what you can and cannot do with your IRA before you engage in any transaction.
Prohibited transactions can also occur as a result of self-dealing, where the account owner or other disqualified persons benefit from the IRA’s investments. For example, if you are a real estate agent or broker and your IRA purchases a property, you cannot collect a buyer’s agent commission from that transaction, as it would result in personal financial gain. Instead, you must waive the fee and either lower the purchase price or have another agent represent the IRA.
If your IRA engages in a prohibited transaction, the entire account is considered distributed and is no longer classified as an IRA. This means the account becomes subject to regular income taxes and, depending on your age, may also incur early withdrawal penalties. You will also be subject to the 10% early withdrawal penalty and may also have accuracy related penalties of 20% of the tax owed added. Because the consequences for a prohibited transaction are drastic, it is critical that self-directed account owners understand and comply with these rules.
By understanding and adhering to these rules, you can protect your retirement account and ensure compliance while making real estate investments. Always consult with a legal, financial, or tax professional when navigating these complex regulations.
Many self-directed retirement account holders, especially those investing in real estate, rely on an IRA-owned LLC (commonly referred to as a Checkbook IRA/LLC) to manage their assets. Under this structure, the IRA owns 100% of the LLC, and the LLC, in turn, owns the real estate. Instead of purchasing property directly in the name of the IRA custodian, your IRA invests in the LLC, and then the LLC owns the real estate.
Typically, the IRA owner acts as the manager of the LLC. This means that while the IRA owns all the membership/ownership units of the LLC, the IRA owner manages the LLC’s activities. Acting as the manager of an LLC is similar to being the president of a corporation—you have the authority to sign documents and make decisions on behalf of the LLC.
As manager of the LLC, the IRA owner can open a LLC business checking account in the name of the LLC and as manager can be the authorized person on the LLC business checking account. This allows the IRA owner, as manager of the LLC, to sign on checks, send wires, or make other transaction from the LLC business checking account. The IRA funds are then invested into the LLC business checking account, giving the LLC the resources to purchase assets. Because all investment funds originate from the IRA, the LLC is 100% owned by the IRA and is considered a disregarded entity for tax purposes. Since the LLC is a disregarded entity, it does not need to file a tax return to the IRS but does need to pay any annual fees to the state it is established.
When making an offer on a property, the LLC is listed as the buyer on the real estate purchase contract. Any earnest money deposits or closing funds come directly from the IRA owned LLC checking account. The IRA owner, acting as the LLC manager, signs the purchase contract and handles financial transactions from the LLC business checking account like issuing checks or wiring funds.
It’s critical to remember that since the LLC is entirely owned by the IRA, its funds must strictly be used for investment purposes. They cannot be used for personal expenses or to pay the IRA owner. If you wish to withdraw funds, the money must first be transferred from the LLC back to the IRA, and from there, you can take a distribution under standard IRA rules.
By utilizing an IRA/LLC, you can gain more direct control over your self-directed retirement account, making the process of investing in assets like real estate smoother and more efficient. Learn more.
Investing in real estate through a self-directed IRA offers the same tax benefits as investing in traditional assets like stocks or mutual funds within a retirement account. Whether you have a Traditional or Roth IRA, the tax-deferred (Traditional) or tax-free (Roth) treatment remains consistent.
For instance, when you buy and sell stocks within your company 401(k) or a standard brokerage IRA, you avoid paying capital gains taxes on any profits. This tax advantage is one of the primary reasons retirement accounts are such powerful tools for saving and investing. Similarly, when you use a self-directed IRA to invest in assets like real estate or private company stock, any gains from a sale are also shielded from capital gains taxes.
The table below highlights the identical tax benefits between a self-directed IRA investing in real estate or private stock and a standard IRA trading publicly traded stocks. Investing through your IRA can be a strategic way to grow wealth while minimizing your tax burden.
IRA
Self-Directed IRA
Investment
Publicly traded stock in IRA
Real estate
Purchase
4,000 shares at $50 a share = $200,000
Buy real estate for $200,000
Sale
$300,000
$300,000
Gain
= $100,000
= $100,000
Tax
No capital gains tax on $100,000 gain
No capital gains tax on $100,000 gain. No need to do a 1031 exchange or meet replacement rules.
Table, IRA & SDIRA Identical Tax Treatment
Let’s walk through how to use your IRA to flip or rent a property. Typically, you would use the checkbook IRA/LLC structure to do a real estate flip with your IRA funds. First, the purchase contract and deed must be in the IRA owned LLCs name. All funds for the purchase, including the earnest money deposit, must come directly from the IRA owned LLC. The account owner is not purchasing the property personally, so the contract and payment cannot be in the IRA owner’s name nor can you use personal funds.
All property expenses and improvements must also be paid from the IRA owned LLC checking account, and no personal funds can be used. Similarly, any rental income or sales profits must go back into the IRA owned LLC bank checking account.
A key benefit of using an IRA to invest in real estate is the tax advantage. Income or gains, whether through rent or gain on sale, isn’t taxable within the IRA. For Traditional IRAs, the money grows tax-deferred, meaning taxes are paid only when you withdraw during retirement. Roth IRAs offer tax-free withdrawals at retirement.
If you have a Roth IRA, placing your best real estate deals there can maximize tax-free growth. Even with a Traditional IRA, your income and gains grow tax-deferred, allowing significant growth until retirement.
By following these rules, you can maximize the benefits of using your IRA for real estate investments, ensuring your earnings work harder for your future.
Are you exploring real estate investments for your Self-Directed IRA (SDIRA)? Before diving in, we strongly recommend consulting with real estate professionals or advisors experienced in SDIRA investing. Their guidance can help ensure your strategy is sound and that all activities comply with IRS regulations.
At Directed IRA, we act as your IRA custodian, facilitating your investments—but we do not offer investment advice or sell any products or investment opportunities. It’s crucial to conduct thorough due diligence before committing to an investment. This may include inspections, market analysis, and evaluating costs versus income potential. Ensure the property aligns with your investment goals, offers expected returns, and adheres to SDIRA rules.
To begin, define your goals and criteria for the ideal investment. A clear strategy will streamline your search. You can explore opportunities through online platforms, local real estate agents, investment groups, or specialized property listings. Networking with seasoned investors and attending industry events can also uncover valuable leads.
Once you’ve identified the right investment, head to our Invest Account page to complete your transaction and take the next step toward growing your IRA through real estate.
First, decide whether you want to use the checkbook IRA/LLC structure or whether you want to own real estate directly in the IRA’s name. The IRA/LLC is most popular for investors flipping properties, buying at auction, rehabbing properties, or who are holding rentals or multiple assets as it gives the account owner more control of the investments and transactions at the LLC level.
The other option is to invest the IRA directly into the real estate investment (the IRA will be on title to the real estate). To initiate an investment at Directed IRA, head over to the Invest Account page. From there you can fill out and provide any required forms and documentation for your chosen investment type.
Be sure to title all related documents in the name of your IRA, such as purchase contracts or agreements. Once you submit the required forms and funding instructions, our team will review everything and process the transaction, ensuring compliance with IRS regulations. If you’re unsure of the paperwork required, our team is available to guide you through the process and answer questions.
Directed IRA’s standard fees apply across all accounts, regardless of your preferred asset type. When investing in real estate within your IRA, this will include a one-time account establishment fee (if you’re opening a new account), an annual account fee, and an asset processing fee for each transaction (e.g., purchase, sale, or transfer).
Additional costs may arise depending on your specific needs, such as wire transfer fees or expedited processing. A comprehensive fee schedule is available for review on our pricing page.
Yes, Your IRA, or IRA/LLC, can get a mortgage loan when you buy real estate, but you need to know two things before you do.
First, the loan must be non-recourse to the IRA owner, as IRA rules don’t allow the owner to be personally responsible for the loan or extend credit to the IRA. With a non-recourse loan, the bank lends money to the IRA or IRA/LLC and secures the loan with a deed of trust or mortgage on the property. If there’s a default, the lender can foreclose and take the property but cannot pursue the IRA or its owner for any loan deficiency. Because the lender’s recovery is limited to the property, banks require 30-40% down for non-recourse loans. Some banks specialize in these loans, and it’s best to use a lender experienced with IRAs. We have a list of banks who offer non-recourse loans to IRAs or IRA/LLC buying real estate here.
Second, the Unrelated Debt Financed Income Tax (UDFI) applies when an IRA uses debt to leverage investments. The IRS taxes the portion of income tied to the debt, but not the portion funded by IRA cash. For example, if your IRA buys a $100k rental property with $40k cash and a $60k non-recourse loan, the IRS taxes 60% of the income as UDFI. The UDFI tax rate is based on trust tax rates, maxing out at 37% on rental income, after expenses like depreciation. When the property is sold, the IRS applies the lower capital gains tax rate of up to 20% for UDFI. UDFI is a type of UBIT tax that applies when debt is involved. The good news on UDFI is that it does not apply to gains from the cash portion of funds used to invest in the real estate.
Some self-directed IRA investors stick to buying real estate with cash to avoid UDFI, while others see UDFI as a cost of doing business to acquire more properties and boost returns. Keep in mind, UDFI tax is only due on net rental income or net gains after deducting expenses and depreciation. Also, many investors say with $100,000 I could buy $100,000 in stock or ETFs or even real estate (if only using cash) or I could leverage my IRA with debt and buy $300K in real estate? If I bought with debt I don’t pay any tax on the gains from the $100,000 in real estate and only pay it on the income and gains on $200,000 and that is only a percentage of that income or gains from the debt. In the end, I am able to buy more assets, generate more income and gain, and only pay tax on the additional leveraged part that I wouldn’t have been able to invest if I didn’t use debt. So, in the end, it doesn’t hurt or eat into taxes on the cash invested from the IRA (e.g. $100,000) and is only being applied to leverage you had to generate more income and gain that was never retirement account dollars in the first place.
A significant mistake is engaging in prohibited transactions, such as personal use of the property or selling it to a “disqualified person” like family members. These actions could disqualify the IRA, resulting in taxes and penalties. Another error is failing to manage all property-related income and expenses within the IRA. Ensure these transactions go through your Directed IRA account (or IRA/LLC as applicable) to remain compliant. Lastly, improper due diligence on the investment can lead to unexpected liabilities or losses, so always research the property and terms thoroughly.
No, Directed IRA is not a seller or promoter of real estate investments. Our role as a custodian is to provide account services and facilitate investments chosen by you. We manage the administrative and compliance aspects while you decide where to invest your IRA assets. This arms-length approach ensures that all investments remain in your control, and we focus solely on supporting your self-directed IRA with secure, compliant services.
While Directed IRA does not give investment advice, our knowledgeable account executives can provide guidance on our processes and requirements. We’ll help you complete the necessary paperwork. Contact our team. If you’re looking for investment strategies or property recommendations, we suggest consulting with a trusted financial advisor, real estate agent or professional, or tax expert familiar with self-directed retirement accounts.
Mat Sorensen, Attorney, CEO, and Founder of Directed IRA, wrote the #1 book on self-directed IRAs – selling over 50,000 copies nationwide. The Self Directed IRA Handbook is a comprehensive guide written for both investors and advisors alike. Download your free copy today!
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Mat Sorensen, Attorney, CEO, and Founder of Directed IRA, wrote the #1 book on self-directed IRAs – selling over 50,000 copies nationwide. The Self Directed IRA Handbook is a comprehensive guide written for both investors and advisors alike. Get access to your SDIRA Handbook resources today!
