Investing in Real Estate in Your Self-Directed Retirement Account

What you'll find on this page:

Overview

Real estate is one of the most popular types of investments in self-directed IRAs.

Your IRA or retirement account owns the property

When investing in real estate in your IRA, technically, you aren't the one buying the property it's your IRA which is buying the property. In other words, your account owns the property and you own the account. This is an important point, especially when you're ready to complete agreements and documents as you'll need to list your IRA as the owner. Details about this and other procedures can be found on the Real Estate Investment Process page.

Real estate choices

An IRA can purchase virtually any form of investment property—residential rental property, commercial property, condos, apartments, and raw land—but it does have to be for investment purposes only.

Real estate IRA investing opens up a wide range of alternative investment options for individuals who are knowledgeable about real estate investing or who work with knowledgeable professionals such as realtors, advisors, sponsors, or brokers.

Advantages

Investing in real estate may help to diversify your retirement portfolio to hedge against the cyclical changes in the stock market, economy, and bank- and government-based investments.

For many who are experienced with real estate investing, real estate investments hold the potential to protect against the loss of principal while potentially generating returns by producing income and capital gains.

When real estate investments are not leveraged (i.e., paid for with cash only), both income and capital gains can flow back to the IRA tax-deferred, or tax-free in a Roth IRA.

By properly structuring an IRA investment in real estate, an IRA can obtain the benefits of real estate investment while retaining the benefits of a tax-deferred retirement account.

Purchasing methods

There are a variety of ways that an IRA can buy real estate. You can use cash, but your IRA can also co-invest with other parties which buy and sell property.

Buying property with cash

If you have your IRA purchase an investment property from an unrelated party and pay cash for it, there are no special issues and this is the simplest way to have your IRA purchase property.

Buying property with a loan

Your IRA can also buy property through leveraging, provided the loan is not guaranteed by the IRA owner (or any other disqualified person) and that the IRA has enough liquidity to support the mortgage and expenses. Generally, most lenders will have limits on the amount of leverage they will permit. If your IRA invests in real estate with financing, a few rules apply:

  • You're not allowed to personally guarantee a loan for your IRA.
  • The loan must be a non-recourse loan in which the IRA accountholder is not personally liable for the repayment of the loan.
  • Your IRA is subject to unrelated debt financed income (UDFI). The net income and/or capital gains attributable to the leveraged portion. The UDFI taxes must be paid with funds from the IRA, so there has to be enough liquidity in the IRA to cover these taxes. See IRS Form 990T and its accompanying instructions for details.

The IRA must have sufficient funds to carry the debt in a real estate investment transaction and have funds to pay for:

  • the mortgage payments
  • property taxes
  • insurance
  • other expenses related the property (e.g., HOA dues, any utilities not paid for by a tenant, etc.)
Non-recourse loans

A non-recourse loan doesn't allow the lender recourse against the individual accountholder or the balance of the IRA funds. In the event of default or foreclosure, the lender can only look to the property which was financed as the sole source of repayment.

The non-recourse lender cannot pursue other assets owned by the accountholder or the IRA.

We provide a list of lenders who make non-recourse loans.

Prohibited real estate transactions

Your IRA can't directly or indirectly buy real estate from a "disqualified person." A disqualified person is:

  • The IRA owner
  • The IRA owner's spouse, descendant (e.g., son), or ascendant (e.g., mother)
  • Spouse of a descendant of the IRA holder
  • A fiduciary of the IRA or person providing services to the IRA (e.g., the trustee or custodian)
  • An entity at least 50% of which is owned (or at least 50% of the beneficial interests are held) by a combination of the above (e.g., if you and your spouse own 50% of an LLC, that LLC is a disqualified person with respect to your IRA)

Your IRA can't purchase real estate and then have a disqualified person use it while it is in the IRA.

The tax laws require that the investments in an IRA not benefit the IRA owner or other "disqualified persons" and prevent "self-dealing" between the IRA and the IRA owner or other disqualified persons.

See Prohibited Transactions Basics for more.

Consult with a qualified tax professional or investment advisor regarding your particular situation.

Next steps

Investing in real estate in your retirement account might be the right choice for you.

PENSCO Trust Company can't provide tax, legal, or investing advice, but we can suggest some important next steps to get you informed.

If you have an account with us and are ready to make an investment, follow the instructions found in Real Estate Investment Procedures.

If you're not yet a client, open and fund an account with us.

This information is for general informational purposes only and is not intended as an individualized recommendation or to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, PENSCO recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager. PENSCO performs the duties of a custodian and, as such, does not provide investment advice or sell investments, nor offer any tax or legal advice.