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Using a Self-Directed Real Estate IRA to Buy a House

self-directed real estate IRA
4 Minute Read

The COVID-19 pandemic disrupted the U.S. economy and forced millions of Americans out of the workforce.  Surprisingly, at the same time, the housing market boomed. With low interest rates, extra government stimulus, and a behavior changes as a result of the pandemic, real estate prices soared, creating many exciting opportunities for real estate investors. This is where the Self-Directed Real Estate IRA comes into play.

With $32 trillion dollars in retirement funds and over $12 trillion in IRA funds, many investors have turned to their IRA or 401(k) as a source of funds to participate in the recent real estate boom.

Key Points
  • Using retirement funds to invest in real estate helps diversify your portfolio
  • Income and gains from your investment grow in a tax-advantaged way
  • Be wary of the IRS rules for Self-Directed IRA accounts before investing

Self-Directed Real Estate IRA Rules

The Internal Revenue Code does not describe what a Self-Directed IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits the IRA holder and his or her lineal descendants (“disqualified persons”) from engaging in certain type of transactions that would personally benefit a “disqualified person”. In other words, a Self-Directed IRA can, generally, make any investment except for collectibles, insurance, or any transaction that does not exclusively benefit the IRA. Below is a partial list of domestic or foreign real estate-related investments that you can make with a Self-Directed IRA:

  • Raw land
  • Residential homes
  • Commercial property
  • Apartments
  • Duplexes
  • Condos/town-homes
  • Mobile homes
  • Airbnb and VRBO
  • Crowdfunding
  • Real estate notes
  • Real estate purchase options
  • Tax liens certificates
  • Tax deeds

It’s All About Tax-Free Growth

When purchasing real estate with a Self-Directed IRA , in general, all income and gains generated by the Self-Directed Real Estate IRA investment would generally flow back into the retirement account tax-free. For example, if one bought a home and paid $100,000 and later sold the home for $300,000, the $200,000 of gain would be tax free!

Two ways to buy a home with a Self-Directed Real Estate IRA

Self-Directed IRA

A Self-Directed IRA offers an investor more investment options than a financial institution Self-Directed IRA. IRA Financial Trust, a regulated trust company, will serve as the custodian of the IRA. Unlike a typical financial institution, IRA Financial generates fees simply by opening and maintaining IRA accounts and does not offer any financial investment products or platforms. The IRA funds are held with IRA Financial Trust and, at the IRA holder’s direction, will invest the funds into alternative asset investments, such as real estate.

Self-Directed IRA LLC

The Self-Directed IRA LLC with “checkbook control” has quickly become the most popular vehicle for investors looking to make alternative assets investments, such as rental real estate, that require a high frequency of transactions. Under the Checkbook IRA format, a limited liability company (“LLC”) is created which is funded and owned by the IRA and managed by the IRA holder. The “checkbook control” Self-Directed IRA allows one to eliminate certain costs and delays often associated with using a full -service IRA custodian.  The Checkbook IRA LLC structure allows the investor to act quickly when the right investment opportunity presents itself cost effectively and without delay.

Why Buy a House with a Self-Directed Real Estate IRA?

There are many reasons people want to buy a house with their retirement account.  The first is diversification.  Gaining the ability to diversify your retirement assets and invest in assets other than equities is a great way to build a well-rounded retirement portfolio.  Second, gain the ability to invest in an asset you know and trust. Many investors have more confidence in investing in real estate, an asset they understand, versus stocks or mutual funds. Third, invest in an asset that can generate cash flow as well as benefit from appreciation.  Fourth, real estate is a hard asset and is considered a smart hedge against inflation.

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    Tips for Buying a House with a Self-Directed Real Estate IRA

    Do your Diligence

    Do your homework before you buy a home with a Self-Directed Real Estate IRA.  This is especially true for real estate located in a state you do not reside in and especially real estate located outside of the country.  Thankfully with the internet you can learn a significant amount a piece of real estate and the surrounding neighborhood.  Ass any good real estate investor and they will tell you that money is made on the purchase of real estate and not the sale.

    Understand the Numbers

    As with every investment, investors should make sure that they understand and have evaluated the economic merits of the investment, as well as the potential financial obligations surrounding the investment. For example, if one is contemplating purchasing real estate with a Self-Directed retirement account, it is important to verify that there are sufficient funds in the IRA to cover the purchase price. In addition, it is imperative that the investor consider any potential expenses, such as improvements, taxes, etc., that are likely to arise while owning the investment as only retirement account funds can be used to pay for such costs

    Beware of Prohibited Transactions

    Internal Revenue Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain types of transactions. When buying a house with retirement funds, do not use any personal funds to pay for any home expenses and do not perform any services. It’s important that you are completely hands-off!

    Beware of UBTI

    In general, all income and gains associated with a real estate investment will flow back to the Self-Directed Real Estate IRA without tax. However, in a number of instances, a little known tax known as UBTI, or the Unrelated Business Taxable Income, could be triggered when a retirement account invests in certain types of transactions and turn a potential tax-free investment into a very tax-inefficient investment.

    In general, the UBTI tax is triggered in three types of investment categories involving retirement accounts:

    • Using margin to buy stocks or securities
    • Using a non-recourse loan to buy real estate (there is an exemption for 401(k) plans under certain conditions). A retirement account is prohibited from using a traditional loan or mortgage because of the prohibition on personal guarantee by the retirement account owner.
    • Investing in an active trade or business operated through an LLC or pass-through entity, such as a partnership

    Thus, if you are using a non-recourse loan to purchase a house with a Self-Directed IRA, you need to be mindful of the application of the UBTI rules, which can trigger a tax of up to 37% on net income from the investment above $1000.  However, if you are self-employed, using a Solo 401(k) plan would be a great way to circumvent the UBTI tax rules and also gain access to the best retirement plan for the self-employed.


    Using a Self-Directed Real Estate IRA to buy a house can be a great way to diversify your retirement assets as well as generate cash flow and tax deferred (tax-free in the case of a Self-Directed Roth IRA) gains on a sale. Of course, it’s important to know what you are getting into before getting started. Speak with a financial advisor to ensure real estate investing is right for you!

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