Real estate investing with a self-directed IRA (SDIRA) often feels inaccessible, but it isn’t reserved only for insiders or high-net-worth investors. It works because the IRS allows retirement accounts to invest in real estate under specific rules, giving investors a legal way to grow wealth with tax advantages most traditional portfolios can’t offer.
The challenge isn’t access. It’s understanding how SDIRAs work, what the rules allow, and how to apply them correctly. When structured properly, an SDIRA can be used to buy property, collect rental income, and compound returns inside a tax-advantaged account.
In this article, I’ll show you how SDIRA real estate investing works, why it’s effective, and what steps you need to follow to use IRA funds for property investments.
What is a Self-Directed IRA Real Estate?
Self-directed IRAs allow you to invest in alternative assets, like real estate, while retaining the tax advantages of a Traditional or Roth account.
An SDIRA allows you to invest in several different types of property, including:
- Single-family homes
- Multifamily units
- Raw land
- Commercial real estate
- Storage units
SDIRAs may offer greater freedom and flexibility, but they are more highly regulated. Any property purchased must be held by the IRA rather than personally owned. So, while your name won’t grace the title deed, it’s still part of your overall wealth portfolio.
This arrangement offers exciting opportunities for growth through rental income or appreciation over time, all while remaining tax-free or tax-deferred.
SDIRA Tax Benefits Unleashed: Supercharge Your Investment Returns
One reason I love investing primarily with a Self-Directed IRA is the tax benefits I receive on all my earnings.
When structured as a Roth account, your SDIRA acts as a tax shield, allowing you to collect earnings in your account without paying a dime on capital gains.
Through compound interest, you can scale your portfolio even more quickly to save for retirement and build wealth.
Investors like Peter Thiel have used these benefits to amass billions of dollars. Through self-directed IRAs and other financial vehicles, I have managed over $1.3 billion in real estate transactions.
How the OBBBA Changes the SDIRA Game
How the OBBBA Changes the SDIRA GameIn July 2025, the One Big Beautiful Bill Act (OBBBA) made the 2017 federal tax brackets permanent. This is a significant win for SDIRA investors, especially if you’re using or considering a Roth SDIRA.
Why does this matter?
Because one of the biggest risks in retirement planning is uncertainty about future tax rates, when rates are temporary, converting funds to a Roth can feel like a gamble. With tax brackets now locked in, that uncertainty largely disappears.
For high-income and high-net-worth investors, this makes the strategy of “pre-paying” taxes today far safer. You pay known rates now, then let your real estate investments grow tax-free for decades inside a Roth SDIRA.
Here’s an example:
- You convert $30,000 into a Roth SDIRA while tax rates are known
- You invest in real estate inside the Roth
- That investment grows to $120,000
- You owe zero capital gains tax and zero income tax on withdrawal
With permanent brackets, your exit strategy is no longer based on guesswork. It’s based on pure math.
This added certainty makes Roth SDIRAs one of the most powerful long-term vehicles for tax-advantaged real estate investing.
The Benefits of SDIRA Real Estate Investing
Investing in real estate with an SDIRA can offer numerous advantages. Let’s explore some key benefits, starting with the power to diversify your retirement savings.
Diversify Your Portfolio Retirement Plan with Real Estate
Adding real estate to your investment mix can help you achieve higher returns and reduce risk, as property values tend not to move in lockstep with stock or bond markets. Experience shows that owning a diverse range of assets helps create a more balanced portfolio.
Providing a Tax Shield
Your investments grow on a tax-advantaged basis, which means profits from rental income or capital gains are either deferred or eliminated, depending on whether you hold a Traditional IRA or Roth IRA.
Several Investment Options Available
Self-directed IRAs offer significant flexibility for real estate investments, including tax liens, wholesaling, house flipping, and more.
Navigating the Rules and Regulations of SDIRAs
Investing in real estate through a self-directed IRA is not just about identifying profitable properties. Navigating the IRS guidelines is a key component of SDIRA investing.
Understanding Prohibited Transactions in SDIRAs
The IRS sets certain boundaries, known as prohibited transactions, for your Self-Directed IRA. Unfortunately, your account may face severe penalties if these rules are broken.
1. The “Disqualified Person” List
An essential part of navigating these waters is understanding who qualifies as a disqualified person according to IRS guidelines. This list includes:
- You
- Your spouse
- Lineal ascendants or descendants and their spouses
- Anyone providing services to your IRA, like an advisor or manager
Note: Siblings, aunts, and uncles are not considered disqualified. You can legally partner with a brother or cousin on a deal.
A common prohibited transaction is directly buying property for personal use with SDIRA funds.
But did you know that even lending money from your retirement account to a disqualified person can lead to penalties? To prevent any potential mishaps, always consult with your IRA custodian before making any significant moves.
2. Debt-Financed Income: UDFI vs. BAPCPA
Self-directed IRAs can use non-recourse loans to leverage real estate purchases, but doing so triggers Unrelated Debt-Financed Income (UDFI) rules.
UDFI means the IRS taxes the portion of income or gains attributable to the debt-financed portion of the property, even inside a tax-deferred or Roth SDIRA. That taxable portion is subject to trust tax rates, which can quickly reach the top bracket.
UDFI Example
An SDIRA buys a $500,000 property using $200,000 cash and a $300,000 non-recourse loan. Roughly 60% of the rental income and future gains are treated as UDFI and taxed annually, while the equity portion continues to grow tax-deferred or tax-free.
Because UDFI can significantly reduce returns, many investors minimize leverage inside SDIRAs or structure debt carefully. Always model UDFI impact with a tax advisor or custodian before using leverage.
Where BAPCPA fits in:
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) does not affect UDFI taxation. Instead, it acts as a protective shield. It safeguards your IRA assets from creditors in bankruptcy, up to an inflation-adjusted cap for contributory IRAs, with unlimited protection for certain rollover funds.
Used correctly, SDIRAs offer both tax advantages and asset protection, but leverage introduces complexity that must be planned carefully.
How to Set Up Your SDIRA for Real Estate Investing
When it comes to investing in real estate through an SDIRA, the setup process is crucial.
With the right steps, you can turn your retirement account into a powerful vehicle for property investments.
The first step is to find a trustworthy SDIRA custodian, such as the Horizon Trust, which I built to make the process easier.
You’ll need to transfer funds from your existing retirement account or personal savings into this new self-directed one. Luckily, your custodian can make the process simple.
Selecting and Purchasing Property Through Your SDIRA
The next part involves selecting suitable investment properties. The great news? You aren’t limited just to residential units; commercial properties, undeveloped land, and even REITs are viable options for purchase.
To purchase property using your SDIRA funds, you must direct your custodian accordingly. They’ll execute all necessary paperwork, keeping things legal and above board while ensuring no tax penalties along the way.
One way to gain more autonomy is to open an LLC with your SDIRA, granting you what is known as checkbook control. This doesn’t remove the custodian, but it allows you to execute transactions instantly as the manager of the LLC, rather than waiting for custodian processing for every check.
Maintaining Compliance Throughout Investment Life Cycle
Your role doesn’t end after purchasing an asset; ongoing compliance is key. Rental income must go straight back into your account.
Also, keep tabs on any potential expenses directly related to maintaining the property, such as repairs or improvements, as these must also be paid from your SDIRA funds.
Jumping into real estate investment with a Self-Directed IRA might feel overwhelming. But, armed with the right know-how and advice, you could reap significant rewards.
Leveraging the One Big Beautiful Bill Act (OBBBA) for SDIRA Strategy
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, locks in 2017 tax brackets permanently—removing the 2026 sunset risk that once threatened Roth conversions. This “rate certainty” supercharges SDIRA real estate strategies.
1. Roth Conversion Sweet Spot
Spread Traditional SDIRA conversions (e.g., rental properties) over 3–5 years, filling 22-24% brackets precisely without 2026 rate spike fears. Convert incrementally to avoid 37% bracket jumps.
2. SALT-Shielded Conversions
OBBBA raises SALT deduction to $40K (2025-2029, under $500K income). Time conversions in high property tax years—the extra deduction lowers AGI, subsidizing more real estate into Roth tax-free growth.
3. Trump Account Legacy Ladder
Seed kids’ Trump Accounts ($1K government deposit for 2025-2028 births + $5K annual contributions). Grow tax-deferred, then roll to SDIRA at 18 for a 50-year real estate head start.
4. Senior Gap Year Conversions
Are you over 65? Use the new $6K deduction (2025-2028) and the higher standard deduction for a “tax valley.” Convert Traditional SDIRA assets (properties, notes) at a lower cost. $6K offsets conversion income directly.
Jumping into real estate investment with a Self-Directed IRA might feel overwhelming. But, armed with the right know-how, OBBBA tailwinds, and advice, you could reap significant rewards.
Read More: How to Use Your SDIRA to Invest in Real Estate in a Hot Market.
Financing Options for SDIRA Real Estate Investments
One reason I love investing retirement money is that most of it is already sitting dormant, ready to be invested.
However, if you don’t have a big enough nest egg saved up, there are still plenty of financing options available.
Non-Recourse Loans (The Only Loan an IRA Can Use)
In essence, non-recourse loans are unique because they only use the property purchased with the loan as collateral. This form of borrowing stands out for its compliance with IRS rules.
If default occurs, lenders can take back only that specific asset and cannot pursue any additional compensation, even if they sell it at a loss.
In simple terms:
- The property itself is the only collateral
- If the deal goes bad, the lender can take the property
- They cannot come after you personally or any other IRA assets
This lets your IRA buy bigger properties, but there’s a trade-off. The IRS taxes the part of the profits that come from borrowed money (called UDFI)
2026 update:
Because the One Big Beautiful Bill Act (OBBBA) made current tax brackets permanent, investors now have more certainty about how much they’ll owe after UDFI taxes. The tax still exists, but the outcome is easier to plan for.
Partnering & Syndications (Pooling Funds)
Beyond non-recourse loans lies another avenue for funding: partnering or syndication. This functions by pooling multiple investors’ capital into one pot, which is then used to fund larger-scale projects that would be beyond each individual investor’s reach alone.
An advantage here is diversification. Since your funds are spread across several properties rather than being tied up in just one place, this reduces risk while still offering attractive returns.
Each financing option has different implications on things like contribution limits and IRS regulations regarding prohibited transactions. Always consult professionals or trusted sources when dealing with complex financial matters.
If owning a whole property feels like too much, you can invest with other people instead.
In short, this means:
- Your SDIRA puts money into a group deal
- The group buys large projects like apartments or storage facilities
- You earn a share of the profits without managing the property
Why do I love this SDIRA real financing option?
- Instant diversification
- Access to bigger, more professional deals
- Less hands-on work
And remember, always consult professionals or trusted sources when dealing with complex financial matters to ensure you’re making informed decisions that align with your investment goals and risk tolerance.
Risks and Considerations in SDIRA Real Estate Investing
Real estate investing with a self-directed IRA (SDIRA) can be pretty rewarding, but it’s not without risks.
Fees and Paperwork: The Devil’s In The Details
A key consideration when venturing into SDIRA real estate investing is the fees associated with maintaining your account and transacting properties. Be prepared for plenty of paperwork, too. You don’t want unexpected costs eating into your profits.
The Need For Capital: It Takes Money To Make Money
To get started in real estate through an SDIRA, you’ll need substantial initial capital; remember, investment property isn’t cheap. Ensure you have enough funds set aside before diving headfirst into this venture.
For example, since 2025, most non-recourse lenders have required a 35–40% down payment and additional cash reserves in your IRA (often about 10% of the loan).
This means if your IRA is underfunded, you may struggle to use leverage effectively.
Beware of Disqualified Persons
You cannot use your Self-Directed IRA to buy property for personal use or sell property to close relatives. Keep yourself informed about who counts as a disqualified person. Remember, this includes:
- You
- Your spouse
- Lineal ascendants or descendants and their spouses
- Anyone providing services to your IRA, like an advisor or manager
A Financial Path to Generational Wealth
Now that you understand all of the rules and strategies governing self-directed IRA real estate investing, it’s up to you to execute what you’ve learned. Real estate is not without its risks, and it takes a very risk-averse person to make money.
You may make mistakes and lose money along the way. But at the end of this journey, you’ll be thankful that you took the leap. There is no better financial vehicle to generate generational wealth than real estate, and no better plan to get you there than a Self-Directed IRA.
FAQs: SDIRA Real Estate Guide
Can I use my existing IRA for real estate investments?
Yes, you can convert your existing Traditional IRA or Roth IRA into a Self-Directed IRA to invest in real estate. However, you’ll need to choose a custodian or trustee specializing in Self-Directed IRAs, as not all IRA providers offer this option.
How do I find a reputable custodian for my Self-Directed IRA?
Finding a reputable custodian is crucial. Start by researching and comparing different Self-Directed IRA custodians or administrators. Look for experienced firms with a solid track record, good customer reviews, and transparent fee structures. It’s also essential to choose a custodian that specializes in real estate investments.
Are there any restrictions on the type of real estate I can invest in?
While Self-Directed IRAs offer many investment options, they also have some restrictions. You cannot invest in life insurance contracts or in collectibles such as art or antiques. However, you can invest in various types of real estate, including residential, commercial, and even raw land.
How does rental income from SDIRA real estate get taxed?
In most cases, rental income flowing into a Traditional SDIRA is tax-deferred, and into a Roth SDIRA is tax-free, as long as all income stays in the IRA and all expenses are paid from the IRA. The major exception is when you use leverage. Then, UDFI rules can cause part of the income to be taxed annually.
Can I personally manage a property owned by my SDIRA?
No. You cannot personally manage, repair, or benefit from a property owned by your SDIRA. Any hands-on involvement is considered a prohibited transaction. All work must be performed by third-party vendors and paid directly from the IRA.
Can my SDIRA buy real estate with a mortgage?
Yes, but only through a non-recourse loan. The loan must be secured solely by the property itself, and the lender cannot pursue you personally. Be aware that using leverage can trigger UDFI taxes on the debt-financed portion of income.
Can I live in or vacation at a property owned by my SDIRA?
No. You, your spouse, and other disqualified persons cannot live in, use, or personally benefit from SDIRA-owned property at any time, even briefly. Doing so can disqualify the entire IRA.
Is SDIRA real estate better in a Roth or a Traditional account?
It depends on your tax strategy. Traditional SDIRAs offer tax-deferred growth, while Roth SDIRAs allow qualified rental income and appreciation to grow completely tax-free. Many investors prefer Roth SDIRAs for long-term real estate growth because they eliminate capital gains taxes.