Real Estate and Self-Directed IRAs

May 12, 2021

Presented by Jake Rivas

Self-directed IRAs are almost identical to traditional IRAs: They both allow you to save money in a tax- deferred retirement vehicle, and the same limits and rules apply to each. With self-directed IRAs, however, you can diversify your investment portfolio into various alternative investments that aren’t available for normal IRAs. These alternative investments come with additional risks, and it’s important to be aware of any potential conflicts, prohibited transactions, and consequences before investing in an asset like real estate.

How do I invest in real estate within a self-directed IRA?

You must open a self-directed IRA with a custodian that specializes in the administration and custody of real estate. These custodians will handle the purchase of the real estate with IRA funds and will manage the assets within the account.

Are there restrictions on the types of real estate that I can purchase?

You are not restricted to any one type of real estate. Examples of available investment properties include commercial or residential properties, condominiums, apartment buildings, and vacant lots.

What are some of the prohibited transaction rules associated with real estate investments within a self-directed IRA?
There are a few prohibited transaction rules of which you should be aware. For example:

  • Any expense related to the investment must come from the IRA and cannot be paid using other personal finances. These expenses include improvement/maintenance costs and property taxes.
  • Any income derived from the investment must go back directly to the IRA. You may request, at a

    later date, that it be sent as a distribution to yourself, but it will be recognized as income and

    taxed accordingly.

  • You cannot purchase real estate in your IRA that any disqualified person will benefit from or use.

    (For example, you cannot use your IRA property as a vacation home or rent it out to your child.) Disqualified persons are defined in IRS Code Section 4975(e)(2) and include the account owner, a direct family member (parents, spouse, or children), or any person providing services to the plan.

  • You cannot borrow from your IRA, sell property to your IRA, or use your IRA as security for a loan.

    How will a real estate investment affect the annual valuation of my IRA?

    Alternative investments can be difficult to value. In the case of real estate, the custodian will most likely require that you provide the current value of the property each year. This can be costly, as the custodian may also require that valuation be performed by a certified third party. Keep in mind that inaccurate valuations of your real estate could lead to tax penalties if they result in distributions from your IRA that are less than your required minimum distributions (if applicable).

    What are the consequences of engaging in a prohibited transaction?

    Engaging in a prohibited transaction can have many costly consequences:

  • The IRA will cease to be an IRA and will be treated as if the assets were distributed on the first day of the tax year in which the prohibited transaction occurred.
  • Any amount in your IRA that exceeds your basis will be considered a taxable gain that will be included in your income.
  • If you are not yet age 591⁄2, the 10 percent premature distribution penalty tax may also apply.
  • If another disqualified individual, other than the IRA owner or a beneficiary, is involved in the

    prohibited transaction, the individual may also be subject to an excise tax.

How do I know if investing in real estate within my IRA is right for me?

Due to the complexity of this type of alternative investment, the best practice is to determine potential advantages and disadvantages by familiarizing yourself with the various rules and regulations surrounding real estate investment within a self-directed IRA. In addition to performing your own due diligence, you should also consult various experts, including real estate agents, custodians, or financial advisors who specialize in real estate investments within IRAs.


This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Jake Rivas, CFP®
i Financial
1901 Northwest Military Highway Suite 102 San Antonio, TX 78213 210.342.4346

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