Posted over 5 years ago

How to Boost Your Real Estate Returns with a Self-Directed IRA

Real Estate Returns

Robert Kiyosaki coined a timeless piece of wisdom in the form of this quote:

“Most people fail to realize that in life, it’s not how much money you make, it’s how much money you keep.” ~ Robert Kiyosaki

It is quite often the case when people make a lot of money but find it difficult to keep it with them. Taxes, inflation, market movements, and mismanaged investments are among some of the common culprits.

While discussing wealth preservation, it is hard to overrule real estate as one of the finest methods to pass on wealth through the generations. Being a real estate investor, you not only get to own a physical asset and receive rental income but with careful planning/structuring, you can create a stable source of income for your retirement. It’s a very common practice among realtors and investors to keep some properties to fund their retirement.

Self-Directed IRA: What you need to know about it?

The key to sustainable wealth generation through real estate investing is to start as early as possible. With that being said, it is equally important to find out ways to preserve your wealth.

Self-directed retirement accounts are one of the best options to invest in real estate. They are often called Real Estate IRAs, primarily because of their ability to invest in real estate and real estate-related assets. Working with real estate investors as our primary clientele, we learn some interesting tax-saving strategies and creative financing stories; but before we get into those discussions, let us first briefly explain the features of a self-directed IRA.

Self-Directed IRA (SD IRA)

A self-directed IRA is a qualified retirement plan that offers complete control over the investment choices available to the retirement account holder. These investment options include real estate, private placements, tax deeds, tax liens, mortgage notes, and similar alternative investments tools.

The account is held with a custodian (IRS-approved trust company), all investments and related transactions must go through through them since you don't have direct access to your retirement funds. For this reason many real estate investors opt for the enhanced version of a self-directed IRA with "Checkbook Control" or Checkbook IRA (aka IRA owned LLC). 

How does it benefit a real estate investor?

If you’re a real estate investor, a self-directed IRA can help you buy houses and offers tax-deferred growth of your assets until distribution.

As a private lender all points and interest on your loan to a flipper or real estate investor would be subject to taxation in the year you generate those incomes. However if the same transaction is done in the tax-deferred environment - those income will be sheltered from taxation until distribution.

Under a regular house flipping transaction, you purchase a house at below market rates, put in repairs, and then sell it for a profit. Without discussing the overwhelming amount of work involved in that single sentence, your profit will be subjected to taxation. The IRS terms it as capital gains and for assets held for less than a year, these rates could be as high as 35%, although the maximum taxation subsides to 15% or less for assets held for a year or longer.

On the contrary, if you flip real estate through a self-directed IRA, the entire process remains the same except for the fact that you don’t have to pay taxes until distribution. In short, you can defer your tax bills until retirement. In fact, you can fund more purchases from the profit generated by your previous transactions. Please be sure to consult with a CPA experienced in this area to ensure that this is not considered business activity, otherwise your IRA will be subject to taxation.

Real estate investing options using a self-directed IRA:

  • Residential properties
  • Commercial properties
  • Multi-family units
  • Farm/agricultural land
  • Apartment buildings
  • Condominiums
  • Raw land and much more

Add the Roth advantage for tax-free gains

In addition to the benefits offered by a self-directed IRA, you have the option to doing investing inside of a Roth account. Under a Roth self-directed IRA, you pay taxes upfront and receive tax-free distributions at the time of retirement. Further, most real estate investment transaction done within a Roth self-directed IRA account does not attract taxation, allowing you to pocket the returns entirely, although a few exceptions may apply.

Related: Roth IRA, Roth 401(k), Roth Solo 401(k) — What’s the Difference?

Additional legal considerations involved in real estate investing using SD IRA

Investing in real estate IRA comes with a unique set of legal considerations, and some of these are listed below.

  • The plan owner/trustee cannot use the property for personal benefit.
  • You cannot do business with the IRA, which includes using your construction or marketing services for the sale or repair of the property. The same rule holds true for your ascendants, descendants, and even spouses. These are often called as self-dealing transactions.
  • Your self-directed IRA can only use non-recourse financing for a purchase, which means you cannot offer a personal guarantee, and in the case of a default, the lender holds no claim other than the property itself (there is only select lenders offering non-recourse loans to retirement accounts). While UBIT tax will apply for the use of non-recourse financing in an IRA, this can be a valuable option in certain situations. Any cost involved in the transaction should come out of the IRA account only, and similarly, any income generated from the property should go back to the plan itself.
  • Unlike regular real estate ownership, you will lose depreciation deductions for the properties owned by a self-directed retirement account.

Related: Warning: Investing in Real Estate with a Self-Directed IRA

A self-directed retirement account allows investors to use their retirement funds for real estate investing and add alternative assets to their retirement plan.

Leave your comment below and let's talk!

Comments (30)

  1. Hi @Dmitriy Fomichenko

    I have not contributed to my IRA in several years since it hasn't performed well. I am considering switching it to a Self Directed IRA. The balance fluctuates between $20-26k depending on the market. Is that a sufficient amount to start a SD IRA in effort to use creative financing for real estate? Thank you for being so insightful with your posts! 

    1. Denny, it depends on how you wish to invest the funds. For example, if you would like to buy a rental property in $100K price range you would have to finance it using non-recourse loan, which typically requires at least 30% down plus 10% reserves. So you have to have at least $40K in your IRA for the numbers to work. If on the other hand you would like to use those funds to invest in trust deeds and can find a smaller loan in line with your balance, or buy some tax liens (you will need as little as few thousand $$ in some cases) - then this can work for you. The bottom line you have to have an investment strategy in place, not just a concept. 

  2. If I use my self directed IRA to buy a ski condo.  Am I allowed to use it for personal use?   Is there a limit on the amount of days?

    1. Mike, you are not allowed to use property owned by your IRA personally. IRS rules prohibit you to receive any personal benefits from the IRA. Using condo just once would be considered a "prohibited transaction" and would disqualify your IRA with resulting taxes and penalties. 

  3. Thank you very much that helps a lot, and I will look into that, I do believe it's qualified though.

    1. You are welcome Brian. If you are able to rollover those funds into a self-directed IRA you will have virtually limitless investment options. Most common are rentals, tax liens and private lending. The bottom line is you can get better returns on your money and will reduce your risk. 

  4. @Dmitriy Fomichenko I have been reading this thread and I must say it is very informative, and thank you.  I do have a question for you.  I am preparing to retire from my current job in a municipality.  When I retire I will be getting funds from an annuity.  As I understand it my options for this annuity are either, receive monthly payments with my pension until the annuity funds are exhausted.  This will be 20+ years, which is not something I want to entertain.  I can cash it out forthright, another bad idea due to the tax implications.  Or roll it into another investment vehicle.  With this option can an annuity get rolled into a self directed IRA.

    Thank u in advance for your time.


    1. Brian, if the annuity is "qualified" then the answer is "Yes". I suggest you contact your current plan administrator or simply look at your annuity statement, if you see word "qualified" somewhere then that means you have a "Qualified Annuity" and it can be rolled over into an IRA, which is a qualified retirement account. If the annuity you have is non-qualified and simply a tax-shelter then you would not be able to roll it over into an IRA. Again, quick call to the administrator will give you the answer. 

  5. Dimitry,

    I have flipped two houses in our SDIRA and now am considering purchasing a property to renovate and hold as a rental.  In the past I have had a trusted friend open up a special bank account, into which was deposited the money from the SDIRA, for the purposes of the renovation.  He would write all the checks, keep the records, and send me regular Excel Spreadsheets detailing the accounting.  I paid him for the service.  

    I have an LLC which I used for "regular" flipping with my personal money, but would like to set up a Checkbook IRA so I can write my own checks for this project.  My question is whether I can use my existing LLC to do this, or does it have to be a new one used only for my SDIRA money?  I assume that it would have to be a new one, so funds are not co-mingled.

     Does the custodian of our SDIRA funds set up the LLC or does an attorney?  Any more information you can supply would be greatly appreciated!  Thank you!


    1. Nina, if your goal is to create a Checkbook IRA, then you will need a brand new, 'special purpose', single member LLC created with the purpose to be owned by your IRA. The existing LLC would not work. Also, you can't just go to Legal Zoom and use them create an LLC for your IRA. Again, it has to be a 'special purpose' LLC and specific language needs to be used when filing for the LLC to make it IRS-compliant. Also, the Operating Agreement of the LLC needs to be IRS-compliant as well. Legal Zoom and most attorneys will not be able to assist you with this - you should be working with an attorney or facilitator firm who specializes in such setups. 

      No custodian will setup such LLC for you, and some custodian will not even allow your IRA to invest into an LLC, so if you want to go this route you need to make sure that the custodian you are working with will allow such structure. Again, working with a qualified professional who will provide you proper guidance is a must in this case.

      1. Dimitry,

        Thank you for your comprehensive and quick response to my question.  I think I will just go with the tried and true route I have used in the past,that being having a trusted friend write all the checks for me and opening a separate account to keep the funds in. That has worked well for me in the past.  

      2. Nina, I was reviewing your profile and it appears that you may qualify for a self-directed Solo 401k plan. Just like Checkbook IRA it enables you to have checkbook control over your retirement account, without the need for a custodian and for the LLC. It comes with number of other benefits that make it superior to an IRA. You can learn more HERE. If you qualify - you owe it to yourself to investigate this option!

  6. This is definitely a subject I need to read read read about!!! As a perspective real estate investor, the finance and legal side of things are intimidating to say the least.  Thanks for the information and reference.  It's always good to get differing opinions and suggestions.  I will always do due diligence by researching each aspect myself but I really do appreciate the post.


    1. William, thanks for reading, I'm glad you found it beneficial! 

  7. Hi Dmitriy,

    What is the difference between self directed IRA and self directed IRA LLC? My understanding is that with the SD IRA LLC, you are the custodian and you can carry out all the transactions by yourself, whereas with the SD IRA, you have to go through the custodian for the transactions. Is this correct?

    1. Hello Nirmal, thank for reading my article!

      Self-directed IRA LLC (aka Checkbook IRA) is a way for the account holder to obtain checkbook control over his or her retirement account. It is accomplished by creating special purpose LLC, which is owned by your IRA and managed by you. You still need a custodian, but their role is passive, since the only investment of the IRA is the LLC. You are not a custodian but rather a manager of the LLC, which give you total (checkbook) control. With this structure you no longer have to go through the custodian for every transaction and can execute a new investment or pay investment related expense as simply as writing a check.

      Let me know if you have any other questions or need further clarification. 

  8. Dmitriy Fomichenko 

    That's awesome! What companies do you recommend me start a SD Roth IRA? Thanks again!


    1. Check out IRA Services Trust Company, we have been working with them for the last 6-7 years... There are number of other companies out there also, contact few, interview them, check reviews and references and go for it.

      Wishing you the best!

      1. sounds good! I'll look them up. One last questions: the cash flow income deposited in the Self Directed Roth IRA won't be subject to taxation today and won't be tax when I withdraw it after 59 1/2 as well, right?

      2. Yes, that is correct.

  9. @Dmitriy Fomichenko

    I am an investor and I buy rental properties. I also work a regular job. I currently have a Roth IRA (but it's not self directed). I want to roll this over to a self directed Roth IRA. Once I do that can I contribute money at any time into the SD Roth IRA? When I cut a check from the SD Roth IRA to buy a property, do I have to deposit the cash flow I get from that property into the SD Roth IRA?

    1. Gulliver, you can rollover your Roth IRA into self-directed Roth IRA. Yes, you can contribute up to $5,500 per year into your account. When you buy a property with your SD Roth IRA, the property will be owned by the IRA (to be correct your IRA custodian will take the title to the property on behalf of your IRA), therefore all income, profits and gains must go back to the IRA. You personally are not allowed to use or benefit from assets or income of the IRA in any way. 

      Hope this helps, let me know if you have any other questions. 

      1. Hi Dmitriy Fomichenko 

        Okay so the cash flow money going back into the SD Roth IRA I can not withdraw and spend? Can I withdraw and spend that money when I'm 59 1/2 years old?

      2. Gulliver, all of the contributions, distributions, tax and other rules are the same for self-directed Roth IRA as for conventional Roth IRA. Your contributions (since you already paid taxes on it) can be pulled out of your Roth IRA at any time (contributions come out first). The earnings can be pulled out after 59 1/2 tax-free also. If you pull out earnings prior to that you will have to pay penalties.  

  10. Thank you for a great article on a really important topic. Can someone who earns money from a wholesale deal put those earning into a SDIRA and use that money to fund investments?

    1. Hello Jamal! Thank you for reading my blog and for your question. There is even better alternative for you. As a wholesaler you are considered to be self-employed and therefore qualify for self-directed Solo 401k. One of the main advantages of a Solo 401k is the ability to make significantly larger contributions to the plan, up to $53,000 per year (compare that to $5,500 with an IRA). So with the Solo 401k you can fund your retirement account much faster and use those funds for non-traditional investments. Another major advantage of the Solo 401k is that with it you don't need a custodian and can have a checkbook control over your account. You can learn about all the benefits in this article:

      Hope this helps!

      1. Wow! Awesome advice. Thank you, I will look into it. 

  11. Hi Dmitriy,

    In the event I have to take a legal action in regards to an investment made by SDIRA, do the legal expenses have to come out of the IRA account or can I pay for it with pretax funds? Would that be considered commingling funds? 

    1. Olga, all expenses related to the investments made by an IRA must be paid from the IRA. Paying such expenses using your personal funds would be a violation and is not allowed. In the same way all incomes derived from the investments owned by an IRA belong to an IRA and must be deposited in an IRA.