The 7 Things to Know When Using A Self-Directed IRA For Investing In Real Estate

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Real estate investing is an excellent means of diversifying your funds and can be accomplished through a self-directed IRA (SDIRA).

There are several big pitfalls that investors can succumb to leading to a loss in tax advantages or causing you to suffer large fines and additional taxes. While you have a great deal of latitude in your investment options and control over the actual day to day process of the investments within a self-directed IRA, there are restrictions and regulations related to how you invest the funds.

Additionally, there are some mistakes that investors make that could do them in.

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Using A Self-Directed IRA For Investing In Real Estate

Here are a few important considerations when using a self-directed IRA in your real estate investing:

1. Investments to Remain for the Benefit of the IRA

Many times investors forget that the investments made with the self-directed IRA are not to be used for personal gain or profit.

At the most basic level, investors need to remember that any money that is collected and any profit made from a self-directed IRA investment is strictly the property of the SDIRA until such time as you will be distributing it for retirement.

This means that you can’t take any of the profits received out of the IRA for your benefit or anyone else’s during the life of the investment and IRA.

2. Don’t Touch Rents Outside of Your IRA

When it comes to collecting rent for a rental property it can be very easy to simply take the money yourself, deposit it into your account and write a check to your IRA.

This practice is a huge violation of the regulations relating to IRA real estate investing. It is vital that income collected from the rental go directly into the IRA itself (or the LLC that has been created to hold the property for the IRA).

The property that has been purchased by the IRA must be maintained by the IRA. This means that all income should be deposited into the IRA bank account and any repairs that must be made or expenses associated with the property must be paid out of the IRA funds.

3. Disqualified Persons for Transactions

There are a number of individuals that are disqualified from transactions relating to a self-directed IRA.

You want to be careful who you deal with when it comes to your IRA transactions. You are not allowed to enter into any agreement or transaction with any lineal descendants or ascendants as well as your spouse.

This includes renting a property to one of these individuals, purchasing property from one of them or even hiring them to work for you to complete repairs and manage the property.

Additionally, you are considered to be a disqualified person when it comes to your self-directed IRA property investment. This means that you are not able to do the maintenance, cleaning or repairs necessary to keep the property up.

The best course of action is to hire a property management company for the job or to keep contact information on a handful of trustworthy professionals to handle the individual jobs.

4. Failure to Have Cash Available for Property Management Needs

Since it is a requirement that all money relating to the investment property held by a self-directed IRA be kept in the same circle, it is vital that you are prepared.

This means that if you have an unexpected expense related to the property, you must pay it out of the IRA investment account, just as you must deposit all funds into this account.

If you have an emergency or require urgent repairs, you need to take the funds to pay for these repairs directly from the self-directed IRA. Having a cushion of money in this account is essential to ensuring your investment is properly maintained and accounted for.

5. Applying for Credit Cards through the IRA

If you have set up an LLC for the investment property that you hold through your IRA you want to be careful not to jump into any of the many credit card offers you will get in the mail.

Lenders are fast to send out offers and applications for credit to new business owners, including those that create an LLC. Any type of a credit card held by or even applied for by a self-directed IRA or its LLC is considered to be a personal guarantee and prohibited by the rules of investing with your self-directed IRA.

6. Maintaining the Original Structure of an LLC

When structuring the LLC with multiple IRA investors you will want to be sure that you understand the division of the investment.

Those divisions will not be able to be altered after they are set up. This means that if one IRA investor contributes and owns 40% of the LLC and another IRA investor contributes and owns 60% of the LLC, those percentages cannot change.

If the first IRA investor decides to transfer some dollar amount out of the LLC and back to the IRA, the other partner has to do the same and in direct proportion to their ownership.

7. Hard Money Lending Considerations

In addition to the concerns related to self-directed IRA real estate investing, you may be considering investing in hard money lending. The short term (typically 6 to 36 months) that most hard money loans adhere to make it an excellent way to keep from tying up your IRA funds long-term.

While this is an excellent way to increase the funds in your IRA there are additional cautions that should be taken when investing for these purposes.

It is important to use the services of a custodian when you are investing in hard money lending. This ensures that there is an unbiased party handling the money and the details.

In addition, you must not lend to friends, family or yourself (or a company you own) in order to stay within the guidelines and away from prohibited people.

The most important consideration when investing your self-directed IRA funds in real estate is to remember that the IRA is a separate body with funds that you can control and invest in an effort to increase the value of the IRA, but that it is not money that you will have access to for any other reason.

This is ultimately your retirement plan and a vessel to help you mass the funds you need to retire as you would like.

How are you using real estate for retirement?

Be sure to leave your comments below!

About Author

Ken Corsini

Ken Corsini G+ is the host of the Deal Farm Podcast (on iTunes) and has 10 years of full-time real estate investing experience. His company, Georgia Residential Partners buys and sells an average of 100 deals per year and has helped hundreds of investors around the country make great investments in the Atlanta market. Ken has a business degree from the University of Georgia and a Master Degree in Building Construction from Georgia Tech. He currently resides in Woodstock, Georgia with his wife and 3 children.


  1. Good article. I’ve heard conflicting information regarding acting as a property manager on a property owned by a self-directed IRA. Is it your understanding that it’s okay to act as a property manager?

    Also, I have heard some say that it’s okay for the owner of the self-directed IRA to perform some maintenance tasks as long as it doesn’t add to the value of the property. For example – the owner could apply some touch up paint in-between tenants. What are you thoughts on this?

  2. Glenn Schworm

    Hey Ken,

    Good article, I could not help but add this piece which is obscure but important. We use Pensco as our SDIRA provider for our clients and have for over 5 years. Last year after talking to a possible lender here on Bigger Pockets we were introduced to another provider named APS, American Pension Services out of Utah, I believe. We did our due diligence on them and they have been in business for over 30 years and all seemed ok. We had one of our friends and investor put her funds with them to start an investment with us. Well, low and behold, the owners have swindled over $20,000,000 from fake notes and are now under indictment. Here is the challenge, the government has frozen all accounts until they sort the mess out. Thankfully we have our investors funds, but she can’t even close the account until it gets sorted out. My point was gong to be to do your homework, but in this case with a 30 year solid track record it doesn’t necessarily apply. I guess you never know. The moral of the story for this incident is to stay clear of APS for your SDIRA needs. I hope that helps some people who read this article avoid a major issue.

    Glenn Schworm

  3. Excellent advice but why would you use a Self-Directed IRA if you qualify for an Individual 401(k) that has many superior benefits, such as:

    1. 56,000 potential annual contributions
    2. Borrow up to $50,000 or 50% of the value of the 401(k)
    3. Can have two components, ROTH and Traditional
    4. Husband and wife can belong to the same Plan
    5. No U.B.T.I. on Non-Recourse debt financing
    6. No LLC needed, save annual filing fees
    6. NO CUSTODIAN, save on annual fees

    • Sharon Tzib on

      You mean a Solo or 401K. Yes, I agree, this was going to be my response. I think a lot of people let the self-employed qualification stop them, but it’s my understanding if you have a real estate business of any kind that generates income, you can still have a Solo 401K even if you have another “job.” The SDIRA rules are archaic compared to the Solo.

      • Dmitriy Fomichenko

        Sharon, one important detail:
        While you may have a Solo 401k plan in addition to your full time job elsewhere, in order to qualify for it one needs to have a presence of self-employment activity and not just a real estate business of any kind.

        For example: one may have several rental properties in his portfolio. And considers this to be his real estate business. Which is true. But that in itself is not enough to qualify for a Solo K. See the income from rental properties is considered to be passive income and reported on schedule E of your tax return. And active, earned, self-employment income is needed. But let’s say that in addition to rental properties he also does flip one or two properties per year or does couple wholesale deals – that is active income reported on schedule C and now would be sufficient to qualify.

  4. Thank you Ken for writing this article since SDIRAs are a very useful tool for the investor, but need a great deal of care to avoid pitfalls while using them.

  5. Jake Thompson

    Thank you for the article Ken. I do want to ask one clarifying question. It sounds like you are saying my mom would not be allowed to invest money from her retirement through a SDIRA to be my investor for a real estate deal that I’m putting together. Is that correct? If so, is there any way that she CAN invest money from her retirement into one of my deals?

    • Dmitriy Fomichenko

      Jacob, your mom is considered to be a “Disqualified Person” to your IRA and it would be prohibited from engaging in any transaction with such person:

      Couple options that come to mind:
      1) She can take a distribution from her IRA and then invest into your deal personally, not through her IRA. When distribution is taken out it would be taxable event, so taxes would be due (plus penalties if she is under 59 1/2)
      2) If she qualifies (as self-employed or small business owner), she could setup Solo 401k plan, rollover her IRA funds there and then take the loan out from the Solo 401k. Solo 401k allows participant loans which is limited to 50% of the balance or $50,000, whichever is less.

  6. Steve Quinn

    Could you use a self-directed IRA in a BRRR situation? For example, you buy a distressed property for $60K, put $20K of improvements into it and get it appraised for $100K? In that example, the LTV is 80% (total investment of $80K into a property worth $100K).

    Could you refi and get a mortgage for $80K and put the money back into the IRA to invest in another property?

    I was looking into using a self-directed IRA for a long term season rental, but it would only make sense if I paid for the house in full, but I didn’t want to tie up all my IRA money into a single property. I was told I could put 20% down with my IRA, and take a loan for the remaining 80%, but the interest rate would be higher than a traditional mortgage and it may be subject to the UBIT tax.

  7. Jim Williams on

    If my self-directed ira contributes 45% cash to buy a 3 unit property, and i contribute 20% cash, plus a mortgage in my name for my remaining 35%(title states IRA 45% undivided interest, me 55% undivided interest), does the loan need to be non-recourse? Can i use one of the units?

    • Dmitriy Fomichenko

      Jim, what you are proposing won’t work. IRA can buy a property with leverage, but the loan must be non-recourse. And you are considered to be “disqualified person” to your IRA and can’t be involved in any transaction with your IRA.

  8. Thomas Southard

    It would seem investing in Real Estate (flips and personal ownership for income) within a qualified plan (such as an IRA) would waste many of the potential tax benefits you’d have through deductions.

    Having said that, there are many RE investments to consider within an IRA which DO seem to make sense. For instance, as suggested in the article, I do have SDIRA funds where bridge loans are provided to commercial property developers. Typical returns are 10 – 15%.

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