The Self-Directed IRA for the Real Estate Investor

Other articles on this site explain the basics of the self-directed IRA for more diversified asset options. Real estate investors, particularly those who want to hold rental property, find the self-directed IRA option to be the way to go. You can buy and hold single-family, multiplex homes, apartments, commercial properties, and office complexes in a self-directed IRA. Some basic rules and tips include:

  • Any real property must be purchased solely for investment purposes.
  • No personally owned property can be involved, nor can the owner use the properties in the account in any way.
  • Usually, all properties in an IRA must be paid for in cash, and the IRA must pay all costs of ownership.
  • Real estate in an IRA adds new levels of risk, but the growth in value over time can enhance the returns of the retirement account.

The Proper IRA for Real Estate

You will need to set up this account with a custodian who specializes not only in self-directed accounts, but in the specifics and massive rules involved in real estate transactions. The account will be set up to facilitate management of rental property to include repairs, maintenance, rent collection, marketing, and other expenses of ownership.

These details are critical as every transaction and every dollar must move only through the custodian. The account owner cannot mix personal funds with account funds in any way. Though they make decisions, the custodian makes them happen.

What You Own and What You Don’t

First, the IRA owns the property, you do not. The title is in the name of the Trust Company Custodian and the IRA. The property is solely for investment and cannot be used for any other purpose. It cannot be a second home, office, or other property use situation. Those who are considered the same as the owner, or as “disqualified” persons include:

  • Spouses
  • Parents, grandparents, great grandparents
  • Account owner’s children or their relatives
  • The IRA service providers
  • Any entity that owns more than 50% of the property

You cannot purchase the property from one of these disqualified people either, nor can the IRA purchase a property that you already own.

Buying the Property

Banks are reluctant to finance properties in retirement accounts due to risk of investment losses. So, the properties are paid for in cash in most purchases. This is especially true in rollovers of existing traditional accounts to self-directed accounts. Those with high balances are ready to make cash real estate purchases.

Owning the Property

The many transactions that are part of owning rental real estate are the same, but they are all absorbed into the IRA such that:

  • All rental income stays in the account
  • All expenses of ownership must be paid out of account funds, including taxes, maintenance, repairs, marketing, etc.
  • No deductions are available for mortgage interest or other expenses, nor is depreciation available.

Few IRA accounts run into trouble, but when they do it can be due to low cash balances that become unable to pay the expenses of property ownership. If your normal annual contribution limits are not high enough to cover the expenses, you could be in a position to be charged penalties on the account.

Selling the Property

The sale of the property is handled like any other real estate transaction, with the IRA being the seller. All proceeds of the sale must be placed directly into the IRA. Plans should revolve around the time it may take to sell the property and the costs to do so.

Of course, holding high cash flow properties after withdrawals begin on an account can be a strategy as well. If the desired withdrawals can be supported by positive cash flow, then the property can continue to fund the account.

Discuss with your tax advisors and retirement planners the self-directed IRA use for real estate to see if this strategy is appropriate.


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