A self-directed IRA (SDIRA) offers unique tax advantages that aren’t available with traditional retirement plans.

One of the main reasons I swear by self-directed IRAs is because it allows me to invest in real estate, while taking advantage of the tax benefits of an IRA.

As a real estate investor myself, I’ve been able to generate millions in tax-free revenue from various real estate holdings using my tax-protected Roth IRA.

However, self-directed IRAs receive more regulations than most retirement plans and do have some limitations, also known as prohibited transactions.

That’s why I want to share some insights on self-directed IRA real estate investments based on what has worked and not worked for me in the past.

The Basics of a Real Estate IRA

Using your self-directed IRA to invest in real estate is one of the many advantages of converting from a 401(k) or traditional IRA to an SDIRA.

Your SDIRA can be used to purchase the following real assets:

  • Single-family homes
  • Multi Family homes
  • Raw land
  • REITs
  • Commercial real estate
  • Mortgage notes

In addition, SDIRAs can be used to fund non-recourse loans and private equity in mortgage companies that generate lots of revenue.

In short, there is no shortage of ways to invest in real estate using an SDIRA.

Investments can be used to generate passive income on rental properties or to buy and hold equity in a fast-rising market.

All income earned by the property is also directed back to the IRA and is held tax-free if you use a Roth-structured IRA.

However, before we continue, we should note that there are several regulations that govern self-directed IRA real estate investments that many people are unaware of before they open an account.

Real Estate IRA Rules and Regulations

First, all SDIRAs require a custodian, which comes with added fees and time constraints. Custodial interference can be circumvented by achieving checkbook control via an LLC, which I recommend opening through your SDIRA to fund all purchases.

An SDIRA also provides liability benefits, especially if you partner or syndicate a real estate deal.

Secondly, an SDIRA can only be used to buy and sell property in your account—not property you already own.

Third, in order to avoid tax penalties, the IRA owner must avoid a long list of what the IRS deems prohibited transactions.

  • You cannot reside in a property owned through your SDIRA.
  • All handiwork must be contracted out. You cannot work on the property by hand.
  • Your immediate family members, including your spouse, parents, children, grandchildren, and legally adopted children, as well as the spouses of your children and grandchildren, are prohibited from renting or residing in any property owned by your SDIRA account. This restriction also applies to investment providers or fiduciaries of your IRA.

These added caveats do tend to turn some investors off, but these cons are greatly overshadowed by the tax benefits of combining a Roth IRA with an LLC to generate high returns for retirement. Let’s explore some of these pros and cons below.

Pros and Cons of Using an SDIRA to Purchase Real Estate


  • Potential for a high return on investment.
  • Checkbook control enables greater control over assets.
  • Greater investment diversification shields assets from the stock market.
  • Real estate investments grow tax-deferred or tax-free.
  • You can use an SDIRA to invest in properties almost anywhere.
  • Self-directed IRA LLCs are protected from creditors and bankruptcy.
  • All costs come out of the account instead of your pocket.


  • You cannot dwell in the property.
  • Income isn’t pocketed until you cash out.
  • It’s necessary to have plenty of cash in your account to cover all costs associated with the property.
  • Real estate is not a traditionally liquid investment.
  • No DIY improvements allowed.
  • Everything is paid to the IRA account instead of the investor.
  • Unlike a traditional property investment, a real estate IRA requires third-party involvement in the form of an IRA custodian, though this can largely be bypassed with checkbook control.
  • No tax advantages are available for deducting mortgage interest, property taxes, or depreciation.
  • Potential for negative cash flow, problematic tenants, or major repairs.

How to Fund a Real Estate IRA

Now that we have the basics out of the way, it’s time to explore ways to fund your account.

There are several funding options for real estate IRAs. Many investors choose to transfer funds from an existing IRA or SDIRA. It’s also possible to roll funds over from an employer-sponsored 401(k) into a new real estate IRA.

Investors can also make annual contributions within the IRS’s contribution limits, which is $6,500 for people under 50, with a $1,000 catch-up rate allowed for people 50 or over.

How to Begin Investing in Real Estate With an IRA

First, you will need to open a self-directed IRA that will be used for investing in real estate through a brokerage. All real estate IRAs require an IRA custodian, so conduct your due diligence in finding the right one.

After you open an account and fund it, you will need lots of money for purchases and repairs. I recommend establishing an LLC.

LLCs come with liability protection against bankruptcy, and they allow you to exercise checkbook control, which cuts out the middleman of going through your custodian to make a purchase. Since real estate deals are notoriously tedious, this saves you lots of time.

If an IRA has sufficient funds to purchase a property, a cash sale can be made. If the account doesn’t have sufficient funds, the investor has several options for closing the gap, which include:

  • Partnering funds with other investors. In this scenario, profits, expenses, and ownership are divided based on investor contributions.
  • Acquiring a non-resources loan. Note: Non-recourse loans allow the lender to foreclose on real estate used as collateral in the case of default.

Investors can also purchase mortgage notes instead of physical real estate as a low-commitment option. This option makes it possible to earn money from borrowers instead of being a landlord.

Keep in mind that a real estate IRA transaction follows all of the same steps of any traditional property sale. Once escrow is closed, the investor is free to rent or lease the property to anyone who isn’t classified as a disqualified person.

An SDIRA makes it possible to buy real estate that can be used to generate income and value while avoiding taxes.

By following the simple steps outlined above and keeping yourself apprised of all of the latest IRS regulations, you can begin buying and holding real estate in your retirement portfolio so that when you retire, you will have substantially more money baked into equity and generated from passive income.


What is the 5-year rule on the self-directed IRA?

Applied specifically to Roth SDIRAs, the 5-year rule requires investors to own an IRA account for a period of 5 years before taking penalty-free and tax-free distributions. Otherwise, the account holder will be responsible and must pay a penalty.

How do you avoid taxes on an SDIRA?

If you’d like to avoid paying taxes at the rate of ordinary income during the withdrawal period, opt for a Roth SDIRA that is funded with post-tax dollars instead of pre-tax dollars.

Do you pay capital gains on an SDIRA?

With earnings on an SDIRA having tax-deferred status, capital gains and dividends will pile up until the withdrawal period after age 59 1/2. Once withdrawals begin, the earnings will be subject to capital gains taxes at the rate of ordinary income. However, Roth IRA accounts are not subject to capital gains during the withdrawal period.