A Self-Directed IRA (SDIRA) allows investors to diversify retirement portfolios by including alternative assets such as real estate. Unlike traditional IRAs, limited to stocks, bonds, and mutual funds, SDIRAs give account holders more control over investment choices. This guide summarizes how SDIRAs apply to real estate, their benefits, risks, and key compliance considerations.

Benefits of Using an SDIRA for Real Estate:

• Tax-Advantaged Growth – Traditional IRA offers tax-deferred, Roth IRA offers tax-free growth.

• Diversification – Access to alternative assets beyond typical retirement investments.

• Control – Investors choose specific real estate assets such as rental properties, raw land, or commercial real estate.

• Potential for Passive Income – Rental income flows directly into the IRA.

Risks & Challenges:

• Illiquidity – Real estate can be difficult to sell quickly, unlike stocks or bonds.

• IRS Compliance – Strict rules against self-dealing; personal use of the property is prohibited.

• Unrelated Business Income Tax (UBIT) – May apply if property is financed with a loan.

• Custodian Requirement – An approved custodian must handle transactions and documentation.

How It Works:

• Property must be titled in the IRA’s name, not the individual investor.

• All income (e.g., rent) goes back into the IRA account.

• All expenses (repairs, taxes, insurance) must be paid directly from the IRA.

• Custodian manages the account to ensure compliance.

Best Practices & Precautions:

• Work with an experienced SDIRA custodian and real estate advisor.

• Conduct thorough due diligence before property acquisition.

• Maintain clear separation between personal funds and IRA funds.

• Stay current with IRS guidelines and reporting requirements.

In summary, SDIRAs provide a powerful way to use retirement funds for real estate, but they require careful management, strict compliance with IRS rules, and a thoughtful investment strategy. Done properly, they can combine the stability of real estate with the tax advantages of an IRA.

Here are some helpful articles you can check:

1. Can You Use a Self-Directed IRA to Purchase Real Estate?

2. Investing in Real Estate with a Self-Directed IRA: Potential Benefits, Risks, and How to Get Started

3. How to Title Property in a Self-Directed IRA