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AdBits Episode 20 – Buying Real Estate with a Self-Directed IRA

AdBits Podcast

IRA Financial’s Adam Bergman Esq. discusses the ins and outs of investing in real estate with a Self-Directed IRA and how to stay IRS-compliant.

The most popular alternative asset investment for Self-Directed IRAs has always been real estate. Whether you choose the custodian controlled approach, or go at it on your own with checkbook control, real estate is one of the best investments you can make. The Self-Directed IRA allows you to invest in any type of real estate in a tax-advantaged way. In this episode, Mr. Bergman will detail the best ways to invest and what rules you must be aware of.

Investing in Real Estate with an IRA

It doesn’t matter what type of real investment you want to make. So long as it’s within the rules, you can invest! You can choose residential or commercial, rental properties or fix and flips, tax liens and deeds, raw land, domestic or foreign, etc. The one rule set you must keep in mind are the prohibited transaction rules. Essentially, your IRA should be the only thing benefiting from the investment, not you, personally. Further, there are certain people who are considered disqualified persons, such as parents, children, in-laws and any entity controlled by such persons. A disqualified person can not be a part of any real estate investment. For example, you cannot invest in a rental property and stay there yourself or hire your son to renovate. This will lead to the penalties from the IRA.

Now that you know what you can invest in, let’s talk about how to go about using a Self-Directed IRA to invest in real estate.


The full-service approach is also known as Custodian Controlled. The custodian will facilitate the investment for you. You find the investment you want to make, and bring it to your custodian. They will do everything for you. The title of the property would be in their name, for the benefit of you, the IRA owner. You fund the IRA, generally via a rollover or transfer of other retirement funds. Of course, you can directly contribute to the plan, but you are limited to the annual limits, which stand at $6,000 or $7,000 if you are age 50 or older.

Once the IRA is funded, you can now make the investment. You go through the process of finding the property you wish to invest in, put in an offer, etc. When it comes time to purchase, you direct your custodian to use your IRA funds to secure the property. Of course, since the custodian is doing the work, the custodian controlled IRA costs more. They will be the ones signing the documents for the investment. Further, any time you need to pay out funds from your IRA, the custodian will be involved.

Read This: Custodian Controlled vs. Checkbook Control

Checkbook Control

On the other hand, if you are looking for complete freedom of your Self-Directed IRA, you can choose the Checkbook Control option. With a Checkbook IRA, you are in charge of the investment process. The custodian is only there to “custody” your IRA. They are not involved in any way with the actual investment. It’s all in your hands!

To set up a Checkbook Control Self-Directed IRA, you first need an LLC. Anyone can do this. John Doe could set up ABC LLC. The LLC is owned by John Doe’s IRA. When John makes the investment, using his LLC, the property is then owned by ABC LLC, not John Doe. This provides a certain level of anonymity.

The checking account used for the LLC can be opened up at your local bank. It works just like any account, in that you can write checks, wire funds or use your bank card as you wish (so long as you stay within the IRS rules). When you find an investment you want to make, everything is done by you, including any paperwork that needs to be done. Because of this, there are no needless delays, and it’s a lot cheaper. You pay a much smaller fee with Checkbook Control, since the custodian is hands-off.

One last benefit is that you don’t ever need to get your custodian involved. If you need funds to renovate a property after it is purchased, you simply write a check for materials and/or labor. All funds will come from your IRA. It’s important to note that all income and earnings generated flow back into the IRA itself.

Nonrecourse Financing

Another thing to consider is how you plan to pay for the property. When you buy a house, you generally put a percentage of the price down and get a mortgage for the remainder of the purchase price. When using an IRA, you must be aware of the tax consequences of the debt-financed portion of the property. For example, if you put 20% down and take a mortgage on the other 80%, that 80% will be subject to the Unrelated Business Taxable Income tax, or UBTI. All earnings generated from the property (rental income, profit on the sale, etc.) will be taxable based on how much was debt-financed. The UBTI tax goes as high as 37%, which could make an investment a tax liability.

For example, you wish to purchase a flip house for $100,000. You pay half in cash, and finance the other half. The financed portion must be a nonrecourse loan, meaning you cannot guarantee the loan. If you fail to pay the mortgage, only the property can be seized, not any other assets. This makes financing a little tougher, with higher interest rates. After you renovate, you sell the house for $200,000. Since you financed half of the purchase price, 50% (or $50,000) would be subject to UBTI. That’s $18,500 in taxes. That severely cuts into your profits. For some, that might be okay. But for most, that tax hit is not worth the effort of the deal.

There are two options. First, look at less expensive properties. Obviously, buying a property outright is the best solution. However, financing a small portion should keep the UBTI taxes down to a reasonable level. The second option is to partner up with a non-disqualified person. Your IRA can partner with a friend, sibling, coworker, etc. All expenses are split between you and your partner. Of course, any income generate will also be split, based on each of your investment.

The Choice is Yours

A Self-Directed IRA puts you in control of your retirement funds. Whether you choose traditional assets, like stocks and bonds, or alternative ones, such as real estate, you need to self-direct. Whether you want the custodian to do the work, or you want total control, you have options. IRA Financial does not offer any investment advice. It’s up to you, as an investor, to decide what type of investments you want to make. It’s important to work with a financial advisor to devise a plan tailored to your goals and risks.

Lastly, if you do decide to invest in real estate, make sure you do your due diligence. You don’t need to be an experienced real estate investor to get started. Do your homework and work with experts in the field, such as a real estate agent, lawyer and/or planner.

Stay In Touch

We always appreciate our listeners and we hope you will continue to listen and spread the word. You can find AdBits on SoundCloud, YouTube or your favorite streaming platform. Thanks for listening and if you have any topics you want to see covered, give us a call @ 800.472.0646 today!


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