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Navigating Real Estate Investments with Self-Directed IRAs: A Guide for Savvy Retirees

Unlocking the potential of retirement funds for property investment.

Luke Babich //May 13, 2024//

Businessman Holding Paper Graph Over The Increasing House Miniature
Businessman Holding Paper Graph Over The Increasing House Miniature

Navigating Real Estate Investments with Self-Directed IRAs: A Guide for Savvy Retirees

Unlocking the potential of retirement funds for property investment.

Luke Babich //May 13, 2024//

Thanks to inflation, longer lifespans and general economic turbulence, people are more worried than ever about providing for themselves financially during retirement.

Forty percent of current retirees are worried about outliving their savings. This anxiety isn’t unfounded — nearly a fifth of them already have. 

That fear has led Americans to explore more creative ways to utilize their individual retirement accounts, such as using those funds to invest in real estate. Buy into the right property, and you’ll unlock far better returns than if you left that money sitting around.

The best part is, you retain all the tax advantages of the IRA. 

Here’s what to know about using self-directed IRAs for real estate investing.

READ: The Pros and Cons of Investing in Real Estate During a Recession

The type of IRA is important

Not every IRA is eligible for real estate investing.

With some IRAs, the financial institution that manages the account restricts its use. To use an IRA for real estate investing, you’ll need to have a self-directed IRA, which is a type of retirement account that accepts “alternative” investments.

If you have a conventional IRA, you won’t be able to use that money to buy real estate, even if you’re an accredited investor. 

You’ll need an intermediary

An important point to remember is that you’re not buying a real estate investment, your IRA is.

That means you’ll need an IRA custodian to act as a third-party agent during the transaction. This person will handle the paperwork for your real estate purchase and make sure you don’t break any of the rules governing IRA purchases. They’ll charge a fee, but it’s money well spent.

If you run afoul of the rules around IRA purchases of real estate, you’d lose all your IRA’s tax advantages.

Although your custodian will technically carry out the transaction, you still have the final say on the mechanics of the deal. For example, if you’re buying in an expensive market like Denver, you can complete the transaction using a Colorado discount broker to save money.

If you aren’t comfortable giving up this much control, you should look for investment alternatives by talking to trusted financial advisors or doing research through top investing newsletters.

READ: Start Investing in Real Estate — 6 Tips for Millennials

The question of ownership

Because you don’t own the property, you can’t use it as a commercial property or occasional vacation home.

You can’t get around this rule by letting friends or family use it, either.

The IRS has strict rules forbidding “disqualified” people from using your IRA investment property, including your husband or wife, your children and their spouses, your parents, grandparents, great-grandparents, grandchildren and great-grandchildren. 

Plan on paying cash

If you were to seek financing for your real estate investment, you wouldn’t personally apply for the mortgage because you don’t technically own the property. It would be your IRA.

Although it’s possible for an IRA to qualify for a mortgage, it’s difficult, so most people who use their IRA to purchase real estate pay cash.This assumes you have enough in your IRA to purchase your investment property outright.

Keep in mind that once you use some of that money to buy a property, your lower balance could be subject to a different rate of return.

If you buy property using a low-commission real estate agent and other cost-saving strategies, you can preserve as much of your retirement fund as possible.

READ: Maximizing Investments — Harnessing Data-driven Real Estate Strategies

Potential downsides

Because your IRA owns the property, and your IRA doesn’t pay taxes, you won’t be able to take advantage of one of the biggest benefits of ownership — tax deductions.

You won’t be able to claim depreciation, property tax or mortgage interest deductions through your IRA. 

If you rent your investment property, you won’t receive any rental income, either. That money will go directly into your IRA.

If the property requires maintenance or other expenses, that will also come out of your IRA funds. This can quickly run down your IRA balance if repair costs get out of control.

If you exceed the annual limit for contributions by depositing more money into your IRA to cover expenses, you’ll be hit with penalties. 

When it’s time to sell

Your property sale will be a lot like your purchase. You’ll call the shots, but your IRA custodian will handle the actual transaction.

The proceeds from the sale will go directly into your IRA, just as your rental income did.

Whether your money is tax free or tax deferred will depend on the specific IRA you use. 


Luke Babich HeadshotLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times and more.