Sunday, June 23, 2024

How to Use a Self-Directed IRA for Real Estate

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Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisors regarding your specific situation.

IRAs allow you to make tax-deferred investments while you are working so you’ll reap the rewards when you retire. Typically, someone else (often a custodian like Charles Schwab, eTrade, or TD Ameritrade) manages those investments for you, keeping your money in stocks, bonds, and mutual funds.

But what if you want to use your IRA to invest in real estate?

Rolling over your retirement assets into a self-directed IRA, also known as an SDIRA or solo IRA, gives you flexibility and potential for greater returns. I help clients roll over their existing 401(k)s and IRAs into SDIRAs all the time, and most of them love that the SDIRA lets them invest in:

  • Commercial property
  • Shopping centers
  • Office parks
  • Duplexes
  • Residential homes (sales and flips)
  • Tax deeds
  • Condos/townhomes
  • Real estate notes/mortgage notes
  • Tax liens certificates
  • Purchase options
  • Raw land
  • Apartments
  • Mobile homes and mobile home parks
  • Vacation rentals
  • Joint venture investments

And that’s actually the shortlist. There are many more opportunities available.

Related: Top 5 Hacks To Maximize Retirement Savings

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Ditch Your Custodian

As I said, the big IRA companies will keep your money in stocks, bonds, and mutual funds. But if you know about negotiating contracts, performing due diligence, and finding deals in up-and-coming markets, you probably know how to beat Wall Street with smart real estate investments. If that’s the case, don’t you want control over how your IRA is invested?

But watch out: IRA companies sometimes use the term “self-directed” to describe what they offer. But this is wrong. Their robo-advisors aren’t going to give you the control you need to put your money in investments that will outperform the stock market.

Advantages of a Self-Directed IRA LLC or Business Trust

One way to achieve greater discretionary and more immediate control over the funds in your self-directed IRA is to form an IRS-approved legal entity into which the funds of the IRA are invested. You (as the IRA owner and the manager/trustee of that legal entity) will assume direct control over those funds and how they are used.

Business trusts and limited liability companies (“LLCs”) are two types of entities typically used for this purpose. With a business trust the IRA owner will serve as the trustee. With an LLC, the IRA owner will serve as the manager. In both cases, the holding entity gives you full “checkbook control,” meaning you will no longer be bound by the rules and regulations of a traditional IRA custodian, nor will you have to waste time waiting for a custodian’s approval to make an investment transaction.

Related: The 5 Best Investments in My Self-Directed IRA

What Is Checkbook Control?

Checkbook control simply refers to the ability to invest in anything that the IRS allows, including a broad range of nontraditional investments. It’s a highly desirable feature. Rarely is there a literal checkbook involved, but it can be helpful to think of the checkbook as a metaphor for how your plan’s assets are managed.

Essentially, checkbook control is the aspect of your account that allows you to break free from the shackles of custodians and traditional investments. Checkbook control means you can invest, divest, and manage any qualified investments from your retirement funds at any time. You may also be able to prevent unnecessary overheads from fees, taxes, and expenses—all with the asset protection benefits that come from full confidentiality.

Related: Using a Solo 401k To Invest in Real Estate: How Does It Work?

If you want the freedom to control how your retirement assets are invested and the ability to diversify these investments, then you need this feature. The driving factor is to avoid having to submit documentation for each investment transaction or transfer of funds to the IRA custodian for their review and approval. This review process can take up to 2-3 days and moreover, the custodian usually charges a fee for both the approval process and the transfer of funds to the investment. Ouch!

Why waste your retirement funds on such administrative overheads? Why risk missing out on a hot property because another investor got it first (while you were waiting for a bureaucrat to approve the purchase)?

investor-real estate

How to Use a Self-Directed IRA for Real Estate

With a self-directed IRA LLC or business trust, the IRS permits using your retirement funds to make almost any type of investment, including real estate or raw land. Making a real estate investment is as simple as writing a check from your self-directed IRA bank account.

The advantage of purchasing real estate with your self-directed IRA LLC is that all gains are tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until you turn 70½). In the case of a Roth self-directed IRA, all gains are tax-free.

For example, if you purchased property for $500,000 and you later sold for $800,000, the $300,000 of gain appreciation would generally be tax-deferred.

If you purchased the property using personal funds (non-IRA funds), the gain would be subject to federal income tax and probably state income tax, as well.

Related: 6 Tax Scams Guaranteed to Set off Alarm Bells With the IRS

But there are a few differences as far as the “backend” is concerned:

  • All expenses paid from the investment property go through your self-directed IRA LLC or business trust.
  • All rental income checks must be deposited directly into your self-directed IRA LLC (or trust) bank account.
  • Title to the investment property and all transaction documents should be in the name of the self-directed IRA LLC (or trust).
  • Documents pertaining to the property investment must be signed by the LLC manager. The manager can be you.

When using a self-directed IRA LLC (or trust) to make a real estate investment, there are a number of ways you can structure the transaction:

  • Use your SDIRA funds to make 100% of the investment
  • Partner with your family, friends, etc.
  • Borrow money for your SDIRA

Partnering with your family and friends to make a real estate purchase won’t trigger a prohibited transaction if your self-directed IRA LLC or business trust is set up correctly. That’s why it’s important that you get professional help when you’re setting everything up.

Also, when it comes to borrowing money, you must use a non-recourse loan. That is, unless you want to trigger a prohibited transaction and pay UBTI (Unrelated Business Taxable Income) tax.

Buy a Retirement Home With Your Self-Directed IRA

With a self-directed IRA, you can buy an investment property and distribute later for personal use. You can even use your account to acquire the perfect home for your retirement years. This makes your retirement home a retirement benefit!

So, how does this work? You’ll need to purchase the property through your IRA, which will own it as an investment until you retire. You can rent the property until you are ready to retire and move in, making money off of it in the meantime. But you and your family cannot use the property—that’s a prohibited transaction.

Remember: You do not own the property; the IRA does. The IRA rents the property to your tenants. You don’t.


The rental income accrues in your account because, once again, your IRA owns the property. You can lease it to someone outside the family until it’s been distributed, but after that, your dream home is all yours.

When that time comes, you will distribute the property via title transfer from your self-directed to your traditional IRA. It is an “in-kind” distribution, and it means taxes are due for traditional IRAs. If your future retirement home was appraised at $250,000, you will receive a 1099-R for $250,000 from your custodian upon distribution.

Distribution taxes can be high. You might prefer to take partial distributions over time to spread out the pain.

Invest Overseas With Your Self-Directed IRA

Not only can you use your SDIRA to invest in real estate in the United States, but you can also invest in residential and commercial properties abroad. Here are just a few scenarios where you might want to invest overseas:

  • Do you want to have a vacation home in Costa Rica? Buy a beach house now, rent it out until you turn 59½, then take ownership of the property tax-free when your SDIRA becomes available for distribution.
  • Did you immigrate to the U.S. for work? You can buy a property in your home country now, develop it over the years, rent out the home, and at the age of 59½, return to your homeland.
  • Want a string of rental homes throughout several countries for vacationers to rent throughout the year? With the SDIRA, you can enjoy the profits generated by high-end vacation home rentals in hot spots like Venice, Amsterdam, Cancun, and the Bahamas.

Related: Considering Moving Abroad? Here’s How Taxes Work


Buying real estate with a self-directed IRA is essentially the same as buying real estate personally, except you have more tax-savings potential and more potential to grow your nest egg.

To set one up, get help from someone well-versed in the investment benefits of the self-directed IRA business trust or LLC. They should be intimately familiar with the lengthy list of prohibited transactions, so you can make sure that your account does not engage in them or incur any unnecessary and costly penalties.

Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisors regarding your specific situation.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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