Most people think of an IRA as a place to store money for retirement that grows through investments in stocks, bonds, or mutual funds. But there’s another powerful option many don’t know about… You can also use your IRA to buy real estate.
An IRA in real estate means that instead of owning pieces of companies, your retirement account owns physical property—things like a rental house, commercial building, or even a piece of land. You don’t hold the deed in your name; your IRA does. This type of investment can create a steady income from rent and potential profits if the property’s value increases over time.
This approach is made possible through what’s called a Self-Directed IRA (SDIRA). A Self-Directed IRA works just like a regular IRA in terms of tax benefits, but it gives you more control over what you invest in. That freedom can be exciting—but it also comes with more rules and responsibilities.
For example, if you buy a rental home inside your IRA, all money for that property must come from your IRA account. That means the IRA pays for the house, the taxes, the repairs, and any upgrades. Likewise, when a renter pays you rent, that money goes directly back into your IRA and not into your personal checking account. This keeps everything separate and protects the tax benefits that make IRAs so valuable.
Let’s break down how it all works, the pitfalls to avoid, and how a Self-Directed IRA gives you the tools to invest in real estate safely and successfully.
Buying Real Estate in IRA Account
Buying real estate in an IRA account might sound complicated, but it really comes down to following the right steps and rules. Here’s how it typically works:
Open a Self-Directed IRA.
Most large brokerage firms (like Fidelity or Vanguard) don’t allow real estate investments. You’ll need to open your account with a Self-Directed IRA custodian—a company that specializes in helping people invest their IRAs in alternative assets like real estate.
Fund your account.You can fund your Self-Directed IRA by rolling over money from another IRA or retirement account, or by making new contributions (up to the annual limit set by the IRS).
Choose the property.Once your account is ready, you can begin searching for properties to buy. Some investors prefer single-family homes in growing neighborhoods; others might choose commercial spaces or undeveloped land.
Make the purchase through your custodian.
The contract and title must list your IRA as the buyer. For example:
“Preferred Trust Company, FBO [Your Name] IRA.”
Remember that you cannot buy the property personally and then transfer it into your IRA later. This would violate IRS rules.
Manage the property within IRA rules.
All income and expenses go through the IRA. That means your IRA pays for everything from repairs to property taxes, and all rental income goes directly back into the IRA account.
Enjoy potential tax benefits.
If your IRA is traditional, the profits grow tax-deferred until retirement. If it’s a Roth IRA, you could enjoy tax-free growth and withdrawals (if you follow the rules).
Let’s look at a simple example:
Imagine you buy a $150,000 rental home inside your Self-Directed IRA. The IRA pays for the property and all closing costs. Each month, a tenant pays $1,200 in rent. That rent goes back into your IRA tax-deferred, helping your balance grow faster over time. If the property later sells for $200,000, the $50,000 profit also stays in your IRA—without immediate taxes due.
However, you can’t live in the home, stay there on vacation, or rent it to family members. The property is 100% for your retirement investment, not for personal use.
Pitfalls of Owning Real Estate in an IRA
Owning real estate inside your IRA can be rewarding, but it’s not risk-free. There are several pitfalls of owning real estate in an IRA that you should watch out for.
Breaking IRS rules (Prohibited Transactions)
The IRS has very specific rules about what you can and cannot do with your IRA property. For example:
- You cannot live in the property or let family members use it.
- You cannot personally work on the property, even for free. That means no painting, fixing leaky pipes, or mowing the lawn.
- You cannot pay for expenses with personal money or collect rent directly.
Doing any of these things can cause the IRS to disqualify your IRA, meaning you’d lose the tax benefits and possibly face penalties.
Lack of liquidity
Real estate isn’t easy to sell quickly if you need cash. Unlike stocks that can be sold instantly, selling property can take weeks or months. You must make sure your IRA keeps enough cash available for ongoing costs—like property taxes, insurance, or emergency repairs—without having to sell the asset too soon.
Extra costs and fees
Real estate investments can cost more to maintain. You’ll have to pay property taxes, insurance, and possibly property management fees. Your custodian might also charge transaction or annual maintenance fees for handling paperwork and compliance. These costs add up, so it’s important to budget carefully.
Non-recourse loans
If you don’t have enough money in your IRA to buy a property outright, you can use financing, but it must be a non-recourse loan. That means if your IRA defaults on the loan, the lender can only claim the property itself, not other assets in your IRA. Non-recourse loans usually come with higher interest rates and stricter lending terms.
Unintended tax exposure
Even though IRAs are tax-advantaged, using debt (a loan) to buy real estate may trigger something called UBIT (Unrelated Business Income Tax). It’s a special tax applied to income from debt-financed property inside your IRA. It’s not common, but it’s another reason to work with professionals who understand Self-Directed IRAs.
Recordkeeping responsibility
Finally, you must keep excellent records. Every expense, rent payment, and repair must be handled through the IRA custodian. Poor recordkeeping can cause reporting errors or IRS issues. A good custodian can help with this, but you’ll still need to stay organized.
Owning property in an IRA can be like driving a supercar; it can take you far if you follow the rules, but one mistake can send you off course. That’s why many investors partner with professionals who specialize in Self-Directed IRA real estate.
Real Estate in Your Self Directed IRA?
Now that you know the risks and rewards, let’s explore how real estate in a Self Directed IRA works in practice.
A Self-Directed IRA is a retirement account that gives you the freedom to invest in many types of assets beyond the usual stocks and bonds. This includes things like:
- Real estate (residential, commercial, or land)
- Private loans or Trust Deed Notes
- Precious metals
- Limited partnerships
- Private businesses
This flexibility can open new opportunities for building wealth. But because these investments aren’t traded on the stock market, they require you to understand how each asset works.
When it comes to real estate, the process usually looks like this:
-
Open and fund your SDIRA by setting up a Consultation Call
Work with a trusted custodian like PTC who understands real estate. Fund your account through a rollover, transfer, or new contribution.
- Identify your investment property
Use your real estate knowledge to find the right deal. The property can be a rental, land, or even a rehab project (remember, you can’t personally work on it).
- Perform due diligence
Just like any investment, you must research before buying. Check the neighborhood, property condition, rental demand, and expected returns.
- Execute the purchase through your custodian
Once you’re ready, your custodian signs the documents on behalf of your IRA.
- Manage the property properly
A property manager or contractor can handle day-to-day operations since you can’t personally perform work or receive payments.
- Enjoy long-term growth
Rental income and appreciation stay inside your IRA and grow either tax-deferred (Traditional) or tax-free (Roth).
For example, imagine you use a Self-Directed Roth IRA to buy a small duplex for $250,000. Each year, you earn $18,000 in rental income. Over ten years, you’ve earned $180,000 in rent, and the property value increases to $350,000. If you sell it later, your $100,000 profit and all the rental income are tax-free if you follow Roth IRA rules.
That’s the power of owning real estate in a Self-Directed IRA. You control the investment, you diversify your retirement portfolio, and you get to enjoy the benefits of real estate appreciation, all while keeping your retirement tax advantages.
Still, this strategy works best for investors who plan carefully and follow every rule. Partnering with an experienced Self-Directed IRA custodian can make the process much easier and safer.
For company partners looking for more investors using a Self-Directed custodian can mean wonders for your project. If you want to learn more about how a self-directed IRA can bring in more investors for your investment, reach out to our Company Partner team.
If you’re interested in opening your own Self-Directed IRA account, go to preferredtrustcompany.com to set up a Client Consultation.
