Self-Directed IRA for Real Estate
Disclaimer: This article is for educational purposes only and does not constitute legal, tax, or financial advice. Tax laws change frequently and vary by jurisdiction. Consult a qualified CPA, tax attorney, or financial advisor before making investment decisions based on tax considerations.
A self-directed IRA (SDIRA) allows you to invest retirement funds directly in real estate, earning rental income and appreciation on a tax-deferred (traditional IRA) or tax-free (Roth IRA) basis. This is one of the most powerful but underutilized strategies for building tax-advantaged real estate wealth.
How it works
You open a self-directed IRA with a specialized custodian (not a traditional brokerage like Fidelity or Schwab). You transfer or roll over existing retirement funds into the SDIRA. The SDIRA then purchases real estate. All income flows into the IRA and all expenses are paid from the IRA. You direct the investments, but the custodian holds title and processes transactions.
Key rules (critical to follow)
- No self-dealing: You cannot personally use the property, perform maintenance on it, or benefit from it in any way.
- No disqualified persons: You cannot buy from, sell to, or transact with yourself, your spouse, ancestors, descendants, or their spouses.
- All income stays in the IRA: Rent, sale proceeds, and all income must go back into the SDIRA. You cannot commingle with personal funds.
- All expenses paid from the IRA: Repairs, taxes, insurance, and management fees must be paid from IRA funds.
- No personal guarantees: If the IRA-held property has a mortgage, you cannot personally guarantee it (non-recourse financing only).
Traditional vs. Roth SDIRA
| Feature | Traditional SDIRA | Roth SDIRA |
|---|---|---|
| Contributions | Pre-tax (deductible) | After-tax (not deductible) |
| Growth | Tax-deferred | Tax-free |
| Withdrawals | Taxed as ordinary income | Tax-free (after age 59.5) |
| RMDs | Required at 73 | None |
| Best for | High earners (current deduction) | Expected higher future tax rate |
A Roth SDIRA investing in real estate is arguably the most powerful tax strategy available. If you buy a $100,000 rental that appreciates to $200,000 over 15 years while generating cash flow, the entire $200,000 and all accumulated rent are tax-free when withdrawn.
SDIRA custodians
You need a custodian that allows real estate investments. Major SDIRA custodians include Equity Trust, Entrust Group, Advanta IRA, and Millennium Trust. Fees typically include an annual account fee ($200-$500) and per-transaction fees ($50-$250). Compare custodians on fees, responsiveness, and experience with real estate transactions.
What you can invest in
- Rental properties (single-family, multifamily, commercial)
- Fix-and-flip projects (IRA is the buyer and seller)
- Private money loans (IRA lends, collects interest)
- Tax liens and tax deeds
- Real estate syndications and funds
- Raw land
Related articles
- Real Estate Tax Benefits
- 1031 Exchange Guide
- Private Money Lending Guide
- How to Invest in Real Estate
- Real Estate LLC Guide