Using your IRA to invest in real estate can be an excellent way to grow your retirement savings and benefit from the potential long-term growth of physical property. However, this approach involves dealing with complicated regulations and isn’t suitable for everyone. Here’s how you can use your IRA to buy investment property, the rules you need to follow, and guidance to help you decide if this strategy aligns with your retirement goals.
What Is a Self-Directed IRA?
A self-directed IRA is a retirement account that lets you go beyond the usual investments like stocks, bonds, and mutual funds. With this type of account, you can invest in alternative assets such as real estate, private placements, or even cryptocurrency, depending on the rules set by the custodian. While you have full control over your investment choices, a custodian is still needed to handle the paperwork and ensure that everything follows IRS rules.
Unlike traditional brokerage IRAs, self-directed IRAs are managed by specialized custodians who don’t provide investment advice. These custodians handle transactions and ensure everything complies with tax laws, but it’s up to you to research and plan your investment strategy. It’s also crucial to note that the IRA, not you personally, owns any property you invest in. The title will show the IRA as the owner, not your name.
Types of Property You Can Purchase Using Your IRA
When investing in real estate through a self-directed IRA, you’re not restricted to just residential properties. The IRS permits a wide range of investment property types, provided they are solely for investment purposes. Below are some examples of what your IRA is legally allowed to purchase:
- Single-family homes – Perfect for generating rental income or benefiting from long-term value growth.
- Multi-family properties – Buildings like duplexes or triplexes can bring in steady income from multiple tenants.
- Commercial real estate – Spaces like offices, retail shops, and warehouses, all of which are eligible for investment.
- Raw land – Empty or undeveloped land can be held for long-term value growth or future development.
- Vacation rentals (as long as you never use them personally) – Properties that generate income when rented exclusively to third parties.
- Storage units and boat slips – Unique property types that can still provide steady income.
- Mobile home parks and RV parks – These are less traditional options, but they can offer strong returns if managed well.
No matter what type of property you invest in, it must only be used for investment purposes. You, along with any “disqualified persons” (like close family members), are prohibited from living in, using, or benefiting from the property in any way. Violating this could disqualify the IRA and lead to serious tax penalties.
How to Buy an Investment Property with Your IRA
Step 1: Open a Self-Directed IRA
- Find an IRA custodian experienced in self-directed accounts who is open to real estate investments.
- Fill out the necessary forms to set up the IRA and specify the type of account (Traditional, Roth, SEP, etc.).
Step 2: Fund the Account
- Add funds to the account through direct contributions, rollovers from other retirement plans, or transfers from existing IRAs.
- If you’re making new deposits, keep in mind the contribution limits. Most real estate investors rely on rollovers or transfers to access enough investment funds.
Step 3: Identify an Investment Property
- Work with real estate professionals who are knowledgeable about purchases made through IRAs.
- Carefully assess the property’s condition, potential for income, location in the market, and any legal factors involved.
Step 4: Direct the IRA Custodian to Make the Purchase
- Provide your custodian with a purchase authorization, often called a “Buy Direction Letter,” containing the transaction details.
- Ensure that all contracts identify the IRA as the buyer, not you personally, and ensure the title reflects the IRA’s ownership.
Step 5: Manage the Property Through the IRA
- Any rental income earned from the property must go directly into the IRA, not your personal account.
- All costs associated with the property, such as maintenance, repairs, insurance, taxes, and management fees, must be covered using funds from the IRA.
- You are not allowed to do any work on the property yourself. All labor must be hired and paid for with IRA funds.
Rules You Must Follow to Stay Compliant
It’s essential to comply with IRS rules. You are prohibited from using the property personally or transacting with disqualified persons. All financial activity—rent payments, repairs, improvements—must be made using IRA funds. You should not contribute beyond the allowed limit to cover unexpected costs. If you do, you’ll face penalties and jeopardize the tax-advantaged status of your IRA.
If you decide to finance a property, the loan must be non-recourse, meaning the lender can only seize the property if the loan defaults. Moreover, financing may trigger Unrelated Business Taxable Income (UBTI), which means your IRA could owe taxes despite its usual tax-advantaged status.
Selling Property Held in an IRA
When you decide to sell, you’ll need to go through your IRA custodian again. The money from the sale goes straight back into your IRA, where it stays tax-deferred if it’s a Traditional IRA, or possibly tax-free if it’s a Roth IRA. Your account keeps growing with those funds until you start withdrawing money, usually when you retire.
Real estate isn’t as easy to sell as stocks or mutual funds. It can take months to find a buyer, finalize the sale, and get the money back into your IRA. If you think you’ll need quick access to cash from your retirement savings, this is something to keep in mind.
Risks and Drawbacks of Holding Real Estate in an IRA
Although investing in real estate through your IRA can offer good returns, it also comes with big risks. If your IRA doesn’t have enough available, covering emergency repairs can become a real problem. Unlike owning property the usual way, you won’t get tax breaks like depreciation or mortgage interest deductions. In an IRA, real estate is purely about growing your investment over time—not about getting tax benefits in the short term.
Managing real estate in an IRA comes with extra responsibilities. If you accidentally break an IRS rule, your IRA could be disqualified, and you might have to pay taxes on the entire balance right away. On top of that, real estate requires constant upkeep and smart decision-making, which not every retirement investor is ready to handle.
Benefits of Buying Property in an IRA
Even with its drawbacks, real estate can be a smart addition to your retirement plan. It gives you a physical asset that doesn’t always follow the ups and downs of the stock market, helping you diversify your investments. Over time, real estate can increase in value and generate rental income, both of which grow tax-deferred or even tax-free in your IRA.
This strategy works best for investors who have a large retirement savings, know the real estate market well, and can strictly follow IRS rules. If done right, it can lead to significant profits while keeping those earnings tax-protected for many years—or even decades.
Alternatives to Direct Real Estate Ownership in an IRA
If you are an investor and want real estate exposure without the complexities of direct ownership, Real Estate Investment Trusts (REITs) offer a simpler solution. REITs can be held in any IRA and provide passive income through dividends and appreciation. They’re also liquid and professionally managed. This allows you to invest in real estate without being actively involved in managing properties.
Unlike direct ownership, REITs do not come with property management, repairs, or tax headaches. While they also have their own set of risks, REITs represent a more accessible entry point for retirement-focused investors who want more exposure to real estate markets.
Conclusion
Purchasing an investment property with your IRA is entirely possible, but it demands careful execution and strict adherence to IRS regulations. A self-directed IRA is required for this strategy, and every step, from the initial setup to the property’s ongoing management, must be handled precisely to maintain the tax-advantaged status of your retirement funds.
For experienced investors with enough funds, real estate knowledge, and a long-term approach, this strategy can offer great benefits. However, for others, traditional IRA investments or real estate funds might be a simpler and safer option for growing their retirement savings. It’s always a good idea to consult a financial advisor or tax professional before using your retirement money for real estate.
