If you already have a self-directed individual retirement account (SDIRA) and are looking to expand your investment portfolio, you might be wondering how to use it when investing in real estate. 

Many wealthy people use SDIRA accounts as a tax break to increase wealth by investing in non-traditional investments. An SDIRA is an account that holds several types of alternative investments. This may include investments in cryptocurrency, precious metals, forex accounts, and real estate. 

These investments can be prohibited from regular IRAs. An SDIRA account is administered by a custodian, sometimes known as a trustee, with the account holder making the investment decisions. 

Real estate investment is considered an ideal investment as the value of properties tends to rise over time. If you are an active investor, you should consider either investing in rental real estate or flipping properties to diversify your investment portfolio with your SDIRA. 

As long as you follow the IRS rules governing retirement plans, you’ll be able to generate income with the real estate investment. 

You can do this by understanding how SDIRAs work and how to use them to purchase real estate for investment purposes. Here are the rules and how you can get started. 

Can I Purchase Property from My Self-Directed IRA? 

Yes, but there are certain SDIRA rules to follow. 

The first thing you’ll need to have is a trusted custodian to handle all the back-end work. This may include the purchasing transaction, any relevant paperwork, and financial reporting. Having a custodian will help keep you from violating any rules about using your SDIRA to purchase a property. 

It’s also important to remember that purchasing real estate through your SDIRA might require cash payment depending on the property’s value. You will also have to consider any custodian fees you may incur throughout the process. 

Here are the rules you’ll have to follow: 

1. You Cannot Purchase a Property Currently Owned A Disqualified Person 

You cannot purchase a property from any “disqualified person.” This includes yourself, any immediate family members, your beneficiary or fiduciary, or any entity that owns over 50% of the property. 

The real estate you purchase must only be an investment. You won’t be allowed to use it for personal use, such as a vacation or a second family home. 

2. You Cannot Have Indirect Benefits  

In other words, any profit earned from the property must be for your retirement purposes. It cannot be for any indirect benefits, including living in the property, allowing your family members to live in the property, or using it for means other than an investment. 

3. The Property Cannot Be Under Your Name  

It’s important to understand that you and your IRA are separate, meaning the title to the property will have to be in the name of your custodian, not yours. 

4. Any Expenses from Property Must Be Paid from IRA 

The IRA must fund the expenses incurred while or after purchasing the property. These expenses can include utility bills, maintenance fees, or any renovation costs. 

5. Any Income Generated Must Return to IRA 

As we’ve mentioned, any income generated from the real estate must be used for your retirement. This means you have to ensure the income generated from this real estate is returned to your IRA. 

How Do I Purchase Real Estate with a Self-Directed IRA? 

Using your self-directed IRA to purchase real estate can be very confusing. There’s paperwork and rules to adhere to, which can be overwhelming if you’re not familiar with the process. If you’re not sure how to begin, we’ve listed a few steps. 

1. Choose A Specialized Self-Directed IRA Custodian 

Custodians or trustees that manage regular IRAs may be able to help you, but it’s advisable to find a specialized self-directed IRA custodian for this purpose. Self-directed IRA custodians better understand the rules and complexities of using your SDIRA to invest in real estate. 

2. Select Your Investment Property    

Once you’ve chosen your custodian, it’s time to invest in real estate using your SDIRA. Find a property for investing. 

It’s important to consider various aspects of the property to ensure it will help retirement funds grow and not cost you more money in the long run. For example, consider the location, size, and neighborhood the property is in to determine if it’s a good investment for you. 

3. Choose A Real Estate Company That Specializes in SDIRA 

Many real estate companies specialize in SDIRA. These companies have the knowledge and expertise to remove any confusion or hassle from buying a property. 

They’re skilled in ensuring you do not make a costly mistake and can provide any advice you may need to complete the transaction. 

4. Buy the Property with Your SDIRA 

You’ve chosen the real estate you’d like to purchase. The next step is to get approval from your custodian. Once approved, you can make an offer on the property in the name of the self-directed IRA. 

When the offer is accepted, the property goes into escrow. This means that a third party will hold it while this step is completed. After that, the custodian files and signs documentation, and the deal moves forward as an average sales and purchase process would. 

Can I Self Manage My SDIRA When Investing in Real Estate? 

While you can decide on the type of real estate you want to own, you cannot manage your self-directed IRA when investing in one. As previously mentioned, you have to hire a custodian to do that. 

This is because custodians have specialized knowledge on managing your SDIRA and the IRA property on your behalf. It’s in your benefit to have a custodian manage your SDIRA investments to avoid tax complications. 

Using a self-directed IRA gives you complete control of your money and investments. It allows you to build wealth that you can comfortably retire on.

But when you are purchasing an investment property with your SDIRA, this can be more complicated. Unless you have the time and expertise, it’s advisable to seek out a specialized custodian or full-service real estate company that will help you with the entire process. They will also be able to help you avoid costly mistakes that could end up costing time, money, and a hefty tax bill.