So you want to Buy Real Estate with an IRA? A Few Mis-Steps to Avoid!

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I recently attended a Webinar dealing with the IRS which covered whether or not your IRA is operating as a true IRA providing you protection, and the advantages that come when dealing with the IRS.  Before I go any further, I want to make sure and point out that a majority of these Webinars – this one included – were all about inducing fear so that the listeners rush right to a registration page to sign up for counseling and immediately get money switched over to the service provider on the Webinar.  That is an unfortunate reality out there today.  Fear is a highly motivating emotion and fear of getting sued or losing all of your hard earned money are two very powerful fear triggers.  So now that my little disclaimer is over, I can tell you that there were several good points brought up in the Webinar and this a fantastic forum to share those precautionary notes.

In accordance with not making any assumptions, because we all know what assuming can do, right – I want to go over a couple of quick terms.

What is an IRA?

An IRA is an Individual Retirement Account.  It is not an actual investment and is often times mistaken to be one.  Rather, think of it as the investment vehicle that holds your investments such as stocks, bonds, mutual funds, real estate, precious metals or any other investment. IRAs are investment accounts that allow the owner to take advantage of various tax breaks and can come in many different forms – each with their own rules.

How Do You Purchase Real Estate with an IRA?

One of the most common ways that people purchase real estate with their IRA is purchasing shares in a REIT.  However, an investment that has gained a lot of attention and traction with the housing bubble is the Self-Directed IRA.  This is simply a characterization of an IRA where the owner makes the investment decisions for the account and not a brokerage firm.  Remember that the IRA is not an investment.  It is the vehicle.

Traditional vs/ Self Directed IRA

In a traditional IRA there is a brokerage firm advising you as the IRA owner and they conduct transactions for you.  In a Self-Directed IRA, a custodian works on your behalf preparing the necessary paperwork to set up the IRA, but you are responsible for directing the investments.  It is estimated that over 80% of the Self Directed IRA accounts that close are closed because the owner of the SDIRA has never directed a single investment transaction.

Now that we have a few basics out of the way, I will tell you that simply wanting to have a Self Directed IRA and actually putting it to good use are half the battle.  Making sure you put the IRA to good use in a proper and legal way are the other half and you don’t need to hire out services or buy a do-it-yourself protection plan to get the basics down.

Self Directed IRA Key Tips

  • Keep Your SDIRA Passive:  A common misconception is unveiled when purchasers ask about using their IRA to purchase their own home or to purchase a second home.  A key component to keeping the tax advantages for your SDIRA is to keep it passive.  Arms length transactions are key and it is vitally important that investors only make purchases where they plan to use the property as an investment property that will be occupied by a tenant and not the owner themselves.
  • Taking Cash Flow Distribution From Your Account:  The income provided from your SDIRA is absolutely your money, but that does not mean you can bypass the IRA and take the money directly from the investment.  The custodian who you choose to help set up your IRA is responsible for all distributions and all income.  Deviating from that process can wipe out the tax protection and advantage and lead to taxes and penalties.  It is legally your money, but you are using the SDIRA for protection and tax planning and just like a traditional IRA, there are time frames for taking withdrawals and distributions.
  • Self-Dealing & Non-Arms Length Transactions:  Often times investors are interested in the SDIRA for its tax advantages and they are interested in protecting their wealth and assets with entity protections.  Setting up LLC’s or other legal entities to hold title and create barriers from lawsuits.  Unfortunately, the two plans do not always line up.  You can purchase property and title it in the name of an entity and fund it with your SDIRA as long as you do not own the property before hand.  In other words, you cannot purchase property, place it in the name of an LLC and then set up a SDIRA to purchase that property from your LLC.  The transactions must be arms length in nature meaning you cannot buy something from yourself or from your spouse or children or parents.  There are some family member exceptions but they are not pertinent to this article and you would definitely be advised of those by your custodian.  As it pertains to this article, you want to make sure that you are not using your SDIRA to create tax advantages on wealth and assets that you already own.
  • Separating expenses from your SDIRA: Two big problems can occur when purchasing an asset like real estate with your SDIRA.  First, from the very beginning, every cost associated with the purchase must come from the SDIRA.  If an investor places earnest money on a property and writes a personal check, then the transaction could be voiced and considered outside of the SDIRA, which could mean penalties and taxes.  Second, if an investor purchases a property and does not leave a proper amount of reserves in the SDIRA itself it can lead to problems.  With real estate, there are always going to be scenarios where additional costs are going to be incurred.   There are rules in place limiting deposits into a SDIRA just as on a traditional IRA and paying for expenses outside of the SDIRA can have major consequences.  So when purchasing real estate, make sure that you have the additional funds in the account to cover any future expenses.

A quality custodian will always cover these areas with you thoroughly on the front end and take steps to make sure you avoid mistakes.  That being said, knowing the rules and properly preparing to use your IRA can lead to a great investment experience without having to go through the fear mongering to protect your self.

About Author

Chris Clothier

In 2005, Chris Clothier (G+) began working with passive real estate investors and has since helped more than 1,100 investors purchase over 3,400 investment properties in Memphis, Dallas and Houston through the Memphis Invest family of companies.


  1. Excellent reminder of these key points. I would like to add that the investor should do their due diligence when using their self-directed IRA. Some IRA custodians mislead their customers by claiming that the funds are insured by FDIC, causing investors to make reckless decisions. Once the IRA funds leave the custodial account and are invested, they are no longer covered by FDIC.

    • Chris Clothier

      Jeff –

      Excellent reminder. While it is not difficult, there are a lot of little reminders which must be kept in the forefront of an investors mind when making decisions. Surrounding yourself with a quality custodian with a lengthy track record of customer satisfaction is a great way to protect yourself and get good advice.

      Thanks for reading the article and replying!

    • Dmitriy Fomichenko

      Another important aspect of SD IRA to understand is that some think that custodians will protect you from making a “Prohibited Transaction” in an IRA. Custodian can help prevent a prohibited transaction if they see it, but if you happened to commit a prohibited transaction and your custodian didn’t caught that – you are totally responsible for it! That is why it is very important for each account holder to understand the rules and what it is that you can not do before going this route and not relying on the custodian.

  2. I have no IRA, but I have a 24 unit apartment complex. I would like to retire within 3 to 10 years. I have heard that money in a retirement account is fairly well protected from potential creditors. Is there a way for me to move my equity into a self directed retirement account and get the piece of mind that the equity has some protection ?

  3. Chuck H. – Chris please jump in here if I am wrong. Chuck it appears that you are at the beginning a “Disqualified Person” in a few words you cannot bring any assets you already have into an IRA (26 CFR sections 1. 408 et seq.). When you read about IRA LLC’s this routinely comes up. Much reference to Swanson v. Commissioner, a tax court case, is made.

    Chris at the first of your article above you mentioned all the fear mongering out their. Are you suggesting that the FMong. is pointingly to be found in the IRA LLC presentations? And a thought is in the back of my mind that an IRA is protected from creditors but I bet I am confussed with Insurance Policies which are not allowed in an IRA. Thanks

  4. Chris Clothier

    Dan –

    You are correct that what Chuck is describing appears to be self dealing and is not allowed in an SDIRA. When I mention fear mongering, it comes mostly from people who speak from stage or hold Webinars where they are selling either DIY kits or services. You don’t generally see that much from established custodians.

  5. Investing with a self-directed IRA can be extremely profitable if done correctly, but due to the overwhelming size of the potential investment funds available, it is an inevitable target for scams. The SEC has issued a special Investor Alert regarding the use of the self-directed IRA that is worth reading: I strongly recommend that investors work with reputable IRA custodians such as Entrust, Pensco, and Equity Trust — who have been around for a long time. Most important – become educated about how self-directed IRAs work before you make a commitment. Your investment objectives may not be compatible with the rules and regulations that apply to self-directed IRAs.

  6. Chris, thank you so much for the informative article–it’s great to see savvy investors taking advantage of this vehicle. This can be a daunting investment strategy if you’re not used to doing your own due diligence! I also wanted to add that a quality custodian will also clarify their “no advice” policy of not providing any investment, financial or legal advice and express clearly that it is up to the account holder to determine the legitimacy of their self-directed investments. 🙂

  7. Chris,
    Some very good information. I do have a question as to what qualifies as exceptable expenses when it comes to purchasing real estate. I actually have 2 sd IRA’s. One with one of the companies mentioned above and another set up as a llc with check book control. Reason I did this is I lost a very good bank owned property with great rental income because my custodian did not get my check to RE agent on time as bank wanted best and final offer in two days and they got out a day late. Would have gotten property as my offer was all cash and $500 above the other offer. Question is now looking at RE out of country. Do travel and living expenses qualify as exceptable expenses from my Ira if I purchase the property? It is in the Carribean and just want to make sure it does not look like taking a vacation on my Ira..what if I go and look and decide not to buy?

    • Thank you for highlighting one of the primary advantages of the Checkbook LLC – speed. As to the question about travel and living expenses using your self directed IRA, the prohibition under IRC 4975 against realizing any direct or indirect personal benefit has been interpreted to prohibit the use of the funds for these purposes. It is possible that under extreme circumstances, where your personal presence was absolutely required in order to protect the assets held in the IRA, an experienced and knowledgeable tax attorney might be able to successfully overcome the presumption that such expenses are not permitted, but the risk of losing the IRA altogether – and suffer the penalties – make it advisable not to start down that slippery slope.

  8. Chris et al, please provide the links for the Internal Revenue Service that explains the rules for SDIRA and Checkbook LLC. I cannot not find much pertaining to the specifics of SDIRA rules at the IRS website.

    Thank you,


  9. IRS Publication 590, Individual Retirement Arrangements, covers most of the information you would need. The primary regulation governing prohibited transactions is contained in 26 USC 4975: However, most of the advisory bulletins and opinions are issued by the Department of Labor, which acts as the regulatory agency for interpreting various applications of Section 4975. Searching on the terms “IRA” and “4975” sometimes yields a wild combination of articles, rulings, opinions, and endless promotions of how you can or should invest your IRA. However, the terms “self-directed,” “SDIRA,” and “checkbook LLC” are not defined in either IRS or DOL publications or regulations.

  10. Ben Lukes

    Thanks for your guidance. You mention that a person cannot use their SDIRA to purchase property from themselves or a family member, but can they purchase a property from a third party with a family member? The SDIRA would be investing in a property with a business partner (in this case a family member).

    The reason I ask is that I have good credit and an okay income, but not a lot of cash for a down payment. A family member has a lot of cash in an IRA that needs to be put to work. If the partnership is structured the right way, can this work?


  11. majid khan

    i have a few questions:
    1. can i use my llc checkbook sdira funds only for down payments and borrow money from private lenders then using forced equity approach by renovations to properties for flipping or keeping as rentals? what portion of gains for such transactions will have to go to the sidira account bd aussboy down payment money is used from the sdira and rest from a private lender?

    • Dmitriy Fomichenko


      Yes you can use leverage when purchasing real estate in your Checkbook IRA. Please note that the loan must be non-recourse, since you are considered “Disqualified Person” to your IRA you are not allowed to provide a personal guarantee.

      Since IRA owns the property 100% or gains or income from the property belongs to the IRA. IRA is also responsible for all expenses related to the property, including mortgage payments.

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