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  • Tony Gilbert

Self-Directed IRA Real Estate and You: Investing With Benefits

Are you searching for ways to diversify your retirement savings with some alternative assets to maximize profits? Are you sick of piling your hard earned money into mutual funds, only to not see any tax benefits or higher returns than average? Are you an investor that prefers the real estate market to something like precious metals? Self-directed IRA real estate investing may be the perfect solution.

A self-directed IRA is a less-conventional investing strategy that allows investors to assume control of their investments. Like a traditional IRAs and SEP IRAs, all holdings within the account are tax-deferred. However, with the help of a custodian, real estate IRA accounts can hold income-producing rental properties. Learn how you can buy real estate with your IRA!

What is a Self-Directed IRA?

A self-directed IRA is an individual retirement account permitting the acquisition of non-conventional investments, like real estate, private placements, and metals. It grants you greater autonomy over your investments than a standard IRA does.

Self-directed IRAs are not managed by financial institutions like banks or brokerage firms. Instead, the account holder (individual investor) makes all decisions by going through a specialty firm with self-directed IRA custodians on staff.

The main benefit of a self-directed IRA is that it provides investors with greater flexibility when it comes to their investment choices. Real estate investors prefer this method because it allows them to collect rental property income on their real estate assets, while also receiving tax benefits from an investment property.


However, investors must be cognizant of the limitations concerning what assets can be retained in a self-directed IRA. The biggest obstacle is related to personal use of the property. Prohibited transaction rules prevent individuals from engaging in activities related directly or indirectly to their own personal interests while investing via their self-directed IRA. Real estate in a self-directed IRA can't be used for personal activities by the owner or any of their direct relationships.

Benefits of Investing in Real Estate with a Self-Directed IRA

Investing in real estate via a self-directed IRA can be a lucrative route toward a comfortable retirement. Putting real estate in your self-directed IRA allows you to earn passive income on a monthly basis, which provides a lot of freedom during retirement.

Just like a traditional IRA, the assets held in a self-direct account have limited taxation. All holdings within a self-directed account are considered "post-tax." This means all necessary deductions were taken up front, and all subsequent withdrawals are tax-free. The biggest benefit here is that it allows you to enjoy untaxed appreciation on your rental properties. Rental income will be taxed prior to entering the IRA, so no further deductions are required after that.

The indirect benefits of adding real estate investments to a self-directed IRA are that they can provide diversification benefits, allowing for risk distribution across different asset classes to reduce volatility and enhance returns. However, playing with the real estate market in an IRA account can get extremely tricky thanks to complex IRS rules, so it's worth speaking to a financial advisor for tax advice related to potential taxable income and IRS regulations around this style of investing.

How to Get Started with Self-Directed IRA Real Estate Investing

Ready to become the proud owner of some commercial properties? Self-directed IRA real estate investing may offer an opportunity to broaden one's retirement portfolio and potentially boost returns, but you have to be careful when getting started. It's essential to be aware of the rules and regulations related to this type of investing prior to embarking on it. Here are some tips on how to get started with self-directed IRA real estate investing.


Find a Custodian

All self-directed IRA holders are required to work with a custodian. A real estate self-directed IRA custodian is responsible for protecting your retirement funds, but they’re still different than an advisor or consultant. They serve as a central manager of your investments, ensuring that your assets are held in compliance with government regulations. They assess compliance and take care of financial activities such as account setup, tracking movement and liabilities, contributions, and so on. Custodians will also provide guidance and advice to help you make sound decisions in managing the money in your retirement account. In short, a real estate self-directed IRA custodian is a trustworthy agent making sure your money is safeguarded while you pursue alternative investments.

Research Different Types of Real Estate Investments

Once you have opened your account, it’s time to for some due diligence! Start researching different types of investments available through self-directed IRAs to decide which ones are right for you. Consider factors like risk tolerance, return potential, liquidity needs, tax implications, fees associated with each type of investment vehicle, etc., when making your decision. During this phase, you'll also want to research lucrative rental markets and choose the one that works best for your needs.

Prepare For Funding

If you're looking to finance a real estate investment through a self-directed IRA, you'll need to secure a non-recourse loan for your self-directed IRA real estate purchase. Unlike standard mortgages that are secured by your personal assets, a non-recourse loan is only secured by the property itself. However, as an added measure of risk for the lender, many of these loans require steeper down payments than the typical 20% for the average rental real estate transactions, and not every financial institution offers this kind of loan.


Investing in real estate through self-directed IRAs can be beneficial in managing retirement funds better but comes with additional considerations compared to traditional financing methods. It's often best to buy the property outright if you have enough money to do so. Luxury real estate investors should be aware of the elevated upfront costs before buying properties with a self-directed IRA.

Stay in Compliance With the Use Rules

When buying a property with funds from an IRA, it's important to understand the many rules that come with it. Purchasing investment properties is the only way to make use of an IRA while strictly adhering to the guidelines - any personal-use properties are off-limits. Once the property has been transferred to the self-directed IRA, no expense can be paid towards the property out of pocket and it can't be used for any personal reasons. This means:

  • You can't personally manage the rental property

  • You can't add personal furnishing or appliances

  • You can't let friends and family members live in the property

Is Real Estate Right For Your IRA?

Exploring the possibility of diversifying your retirement portfolio through investing in real estate with a self-directed IRA can be an attractive strategy. By doing thorough research, finding the right custodian, and forming a plan of action, it is possible to make savvy investments that can expedite your retirement goals.

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