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Investor Insights Blog|Self-Directed Real Estate Investing 101: What You Need to Know About Investing in Real Estate with Your Retirement Account

Real Estate

Self-Directed Real Estate Investing 101: What You Need to Know About Investing in Real Estate with Your Retirement Account

white house for sale

Many investors are surprised to learn it is possible to invest in real estate using their IRAs.

Using self-directed IRAs and other retirement accounts, you can hold a variety of assets including commercial property, residential property, raw land, tax liens, promissory notes, private entities, and more.

Many investors open self-directed accounts to diversify their portfolios with alternative investments, within a tax-advantaged environment.

Though some investors may not have heard of the concept, self-directed investing is nothing new. Since IRAs were introduced in 1974, the IRS has only listed a handful of items that are not permitted in an IRA. (See IRS Publication 590 for the list.)

What’s the Catch?

If nearly any investment is allowed in an IRA, why haven’t you heard of it before? It could be because many IRA providers don’t offer this type of account. You must open an account with a custodian that’s qualified to offer self-directed accounts.

Which Accounts Can Be Used to Invest in Real Estate and Other Alternatives?

People are often surprised to learn there are several retirement plans available to self-directed investors. The most common accounts are the Traditional IRA and the Roth IRA.

Other accounts that can be self-directed include:52 Real Estate Investing Ideas for Your IRA

  • SEP IRA (Simplified Employee Pension)
  • SIMPLE IRA (Savings Incentive Matching Plan for Employees)
  • Solo 401(k)
  • Health Savings Account (HSA)
  • Coverdell Education Savings Account (CESA)

How Does Self-Directed Real Estate Investing Work?

Here are the general steps to investing in real estate in an IRA:

  1. Open and fund a self-directed account – You can do this through a qualified self-directed IRA custodian.
  2. Find a property to purchase
  3. Direct your custodian to fund your investment with your account – Provide your self-directed account custodian the specifics of the property you’d like to purchase with your IRA, how much money you need, where to send the funds, and if documentation requires signing. You can choose to fund the entire purchase or a portion of it with your account.
  4. Manage the investment in your account – Money from expenses and profits must flow to and from your account in the same proportion that it funded the investment.


Self-Directed Investing Rules to Know

The IRS provides guidelines regarding self-directed investments:

Investment must be at “arm’s length”

IRS rules state that you and the investment must be at arm’s length. In other words, you cannot directly benefit from an asset owned by your retirement account.

Your retirement account is designed to provide for your retirement and is not intended to benefit you now. You cannot receive a direct or indirect benefit from the property purchase. It’s considered an “indirect benefit” if your IRA is engaged in transactions that, in some way, can benefit you personally.

A few examples include:

  • Using property held in the retirement account: Using real estate purchased through your IRA as an office, personal residence, vacation home, retirement home, etc. is not allowed.
  • Receiving personal benefits from your retirement account: You cannot lend yourself money from your IRA or pay yourself, or a company you own, to do work on a home purchased by your IRA.
Be aware of “disqualified persons”

Additionally, IRS rules state that a self-directed retirement account may not buy an investment from, sell it to, or otherwise be involved with a “disqualified person.” A disqualified person includes you as the account holder, service providers of the IRA, fiduciaries, family members of lineal ascent or descent (parents, grandparents, children, or grandchildren), and entities of which 50 percent or more is owned directly or indirectly by a disqualified person.

Whenever making an investment decision, please consult with tax, legal, and accounting professionals. You can also read more here or refer to the IRS for more information: Internal Revenue Code 4975 and IRS Publication 590.


Continue Learning: Complete Self-Directed Real Estate 101 Guide

Access the guide to discover more about the self-directed real estate investing process, including:

  • What Happens After You Purchase a Property with Your Retirement Account?
  • Frequently Asked Questions: Purchasing Real Estate in a Self-Directed IRA
1

Can my IRA purchase real estate that I currently own?

No. This is considered a prohibited transaction (see IRC 4975). You may not purchase a property, or interest in a property, that’s currently owned by a disqualified person, which includes yourself.

2

Am I restricted to only purchasing residential property with my IRA?

You are not limited to residential real estate. Your IRA can hold various investment properties such as commercial buildings, vacant land, condominiums, mobile homes and apartment buildings, in addition to residential property.


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