Yes, you can use a self-directed IRA to purchase commercial real estate, and it is one of the most powerful tax-advantaged strategies available to investors who want to diversify retirement holdings beyond stocks and bonds. A self-directed IRA (SDIRA) allows you to hold alternative assets like commercial property, provided you follow IRS rules around prohibited transactions, non-recourse financing, and custodian requirements.
This guide covers everything you need to know about self-directed IRA real estate investing for commercial properties, including how to structure the deal, which taxes apply, and how to avoid the mistakes that disqualify your account.
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What Is a Self-Directed IRA and How Does It Work for Real Estate?
A self-directed IRA is a retirement account that allows you to invest in alternative assets that traditional brokerages do not offer. While a conventional IRA limits you to stocks, bonds, and mutual funds, an SDIRA can hold commercial real estate, private equity, promissory notes, and precious metals.
The key difference is the custodian. Traditional custodians like Fidelity or Schwab do not allow real estate holdings. You need a specialized SDIRA custodian such as Equity Trust, Entrust Group, or IRA Financial that handles property transactions, title transfers, and expense management.
The IRA itself is the legal owner of the property, not you personally. This distinction matters for every aspect of the transaction, from how the purchase contract is written to how rental income is deposited.
Who Qualifies to Open a Self-Directed IRA for Commercial Real Estate?
Anyone with earned income or an existing retirement account eligible for rollover can open a self-directed IRA. There are no special income requirements or accreditation standards. However, SDIRA real estate investing works best for investors who meet certain practical criteria.
You need enough capital in your retirement accounts to cover the down payment and reserves. Most non-recourse lenders require 35% down on commercial properties purchased through SDIRAs, and you will need reserves for closing costs, repairs, and operating expenses. All funds must come from the IRA, not your personal accounts.
If you have a 401(k) from a previous employer, you can roll those funds into a self-directed IRA without triggering taxes or penalties using a direct trustee-to-trustee transfer.
Should You Choose a Traditional SDIRA or Roth SDIRA for Commercial Property?
The choice between a Traditional SDIRA and a Roth SDIRA has significant tax implications for commercial real estate investors. Both account types can hold the same alternative assets, but the tax treatment of contributions and distributions differs substantially.
A Traditional SDIRA lets you contribute pre-tax dollars, which means you may have a larger initial balance to work with. However, every dollar you withdraw in retirement is taxed as ordinary income, including all of the property appreciation and rental income that accumulated over decades.
A Roth SDIRA uses after-tax contributions, but all qualified distributions are completely tax-free. For a commercial property that may double or triple in value over a 15 to 20 year holding period, the Roth advantage can be enormous.
For investors with a long time horizon and properties expected to appreciate significantly, the Roth SDIRA is generally the stronger choice. The tax-free growth on a commercial asset can save hundreds of thousands of dollars compared to a Traditional SDIRA distribution taxed at ordinary income rates.
What Are the Step-by-Step Instructions for Buying Commercial Real Estate with an SDIRA?
The process of purchasing commercial real estate through a self-directed IRA involves several steps that differ from a conventional property purchase. Every action must be taken by or on behalf of the IRA, not by you personally.
During the property search phase, you can identify and evaluate properties yourself. However, once you decide to move forward, the purchase contract must list your IRA as the buyer. For example, the buyer line would read "Equity Trust Company FBO [Your Name] IRA" rather than your personal name.
All earnest money, inspection fees, closing costs, and the down payment must come directly from the IRA account. You cannot contribute personal funds to supplement the IRA's funds for the transaction. If the IRA does not have enough to close, you must either find a less expensive property or contribute additional funds to the IRA within annual contribution limits before the closing date.
After closing, all rental income flows into the IRA, and all property expenses including property management fees, insurance, repairs, property taxes, and loan payments are paid from the IRA. This is not optional. Mixing personal and IRA funds is a prohibited transaction that can disqualify the entire account.
If you are looking at investment properties that generate strong cash flow, a DSCR loan structure can help you evaluate whether the rental income covers the debt service obligations within your SDIRA.
What Are Prohibited Transactions and How Do They Disqualify Your IRA?
Prohibited transactions are the single biggest risk in self-directed IRA real estate investing. The IRS defines these under Internal Revenue Code Section 4975, and a violation does not result in a fine or penalty on the transaction itself. Instead, the entire IRA is treated as having been distributed on the first day of the year in which the violation occurred.
That means you owe income tax on the full value of the IRA, plus a 10% early withdrawal penalty if you are under age 59 and a half. For an IRA holding a $800,000 commercial property, a single prohibited transaction could result in a tax bill exceeding $300,000.
The rules are straightforward but strict. You cannot buy property from or sell property to yourself, your spouse, your parents, your children, your grandchildren, their spouses, or any entity in which you hold a 50% or greater ownership stake. You cannot provide services to the property or use it for personal purposes, even temporarily.
Hiring an independent property manager is a compliance requirement, not just a convenience. The manager handles all tenant interactions, maintenance coordination, and day-to-day operations so that you remain fully hands-off.
What Is UBIT and How Does It Affect Leveraged SDIRA Real Estate?
Unrelated Business Income Tax (UBIT) is one of the most misunderstood aspects of self-directed IRA real estate investing. When your IRA uses debt financing to purchase a property, the portion of income attributable to the borrowed funds is classified as Unrelated Debt-Financed Income (UDFI) and is subject to UBIT.
The tax rate on UBIT follows trust tax rates, which currently reach 37% at just $14,450 of taxable income. This is a steep rate that can significantly reduce the returns on leveraged SDIRA investments.
The calculation is based on the average acquisition indebtedness for the year divided by the average adjusted basis of the property. If your IRA purchases a $1 million commercial building with a $650,000 non-recourse loan, approximately 65% of the net rental income and 65% of any capital gain upon sale would be subject to UBIT.
There is a silver lining. As the loan balance decreases over time, the UDFI percentage drops proportionally. Once the loan is fully paid off, UBIT no longer applies. Additionally, UBIT only needs to be reported when gross unrelated business income exceeds $1,000 in a given year.
Your IRA must file IRS Form 990-T to report and pay UBIT. The custodian typically assists with this filing, but the responsibility belongs to the IRA. For help analyzing whether your deal's debt service coverage ratio supports the returns after UBIT, try the DSCR calculator.
What Is Non-Recourse Financing and Why Does the IRS Require It?
When your IRA takes out a loan to purchase commercial real estate, the IRS requires that the loan be non-recourse. This means the lender's only collateral is the property itself. You cannot personally guarantee the loan, pledge personal assets, or sign any document that creates personal liability for the IRA's debt.
This rule exists because a personal guarantee would constitute an indirect benefit to the IRA from a disqualified person (you), which is a prohibited transaction.
Non-recourse loans for SDIRA purchases come with more conservative terms than conventional commercial loans. Expect a maximum loan-to-value ratio of 60% to 65%, interest rates 1% to 2% above conventional rates, and amortization periods of 20 to 25 years.
Not all commercial lenders offer non-recourse SDIRA loans. You will need to work with lenders who specialize in this niche, such as First Western Federal Savings, North American Savings Bank, or specialty lenders focused on retirement account financing.
If you are exploring acquisition financing options for your SDIRA, understanding non-recourse terms early in the process will help you identify viable properties and set realistic return expectations.
What Is a Checkbook Control LLC and Should You Use One?
A checkbook control LLC is an advanced SDIRA structure where the IRA owns 100% of a single-member LLC, and the IRA owner serves as the manager of that LLC. The LLC opens its own bank account, and the IRA owner can write checks and initiate transactions directly without waiting for custodian approval on every action.
This structure offers significant advantages for commercial real estate investors who need to act quickly. In competitive markets, waiting 3 to 10 business days for a custodian to process a transaction can mean losing a deal. With a checkbook control LLC, you can sign contracts, make earnest money deposits, and close deals on the same timeline as any other buyer.
However, the checkbook control structure comes with higher setup costs (typically $1,500 to $3,000 for legal formation) and greater compliance responsibility. Without a custodian reviewing every transaction, the burden of ensuring compliance with prohibited transaction rules falls entirely on you.
The IRS has affirmed the legality of the checkbook control LLC structure, but it has also increased scrutiny of these accounts. If you use this structure, maintain meticulous records, keep IRA funds completely separate from personal funds, and consult with a tax professional experienced in SDIRA compliance.
How Do You Choose the Right SDIRA Custodian for Commercial Real Estate?
Not all self-directed IRA custodians are created equal, especially for commercial real estate transactions. The custodian plays a critical role in processing purchases, managing ongoing expenses, and filing required tax documents.
When evaluating custodians, prioritize experience with commercial real estate specifically. Some custodians focus primarily on precious metals or private equity and may not have efficient processes for real estate closings, expense payments, or UBIT filing assistance.
Key factors to evaluate include transaction processing speed, fee structure (flat annual fee vs. asset-based fees), responsiveness of the support team, and whether the custodian offers a checkbook control LLC option. For larger portfolios, asset-based fees can become very expensive, making flat-fee custodians like IRA Financial more cost-effective.
Also confirm that the custodian can handle the specific type of commercial property you plan to purchase. Multi-tenant properties, ground-up construction, and properties with complex operating agreements may require a custodian with dedicated real estate expertise.
What Are the Most Common Mistakes in SDIRA Real Estate Investing?
Self-directed IRA real estate investing offers powerful tax advantages, but the rules are unforgiving. The most common mistakes lead to prohibited transaction violations, unexpected tax bills, or both.
The number one mistake is commingling funds. Every dollar that goes into the property must come from the IRA, and every dollar of income must return to the IRA. Paying for a repair out of pocket because the IRA is temporarily short on cash is a prohibited transaction. Planning for adequate reserves inside the IRA before purchasing the property eliminates this risk.
The second most common mistake is performing services on the property yourself. Even seemingly minor actions, like mowing the lawn, changing a lock, or showing the property to a prospective tenant, can constitute providing services to the IRA and trigger a prohibited transaction. Always use a third-party property manager and independent contractors for all property-related work.
Other frequent errors include failing to file Form 990-T when UBIT applies, titling the property in the wrong name at closing, using recourse financing instead of non-recourse financing, and not maintaining adequate cash reserves inside the IRA for unexpected expenses.
If you are evaluating whether a bridge loan could work for a short-term SDIRA investment, make sure the financing is structured as non-recourse and that the IRA can support the higher interest rates typical of bridge lending.
Ready to explore how a self-directed IRA could fund your next commercial real estate acquisition? Our team can help you understand the financing options available, including non-recourse structures designed specifically for SDIRA investors. Contact us today to discuss your strategy.
How Do SDIRA Real Estate Returns Compare to Traditional Retirement Investments?
Commercial real estate held inside a self-directed IRA can deliver returns that significantly outpace traditional stock and bond portfolios, particularly when you account for rental income, appreciation, and tax-sheltered growth.
A stabilized commercial property generating a 7% cash-on-cash return inside a Roth SDIRA compounds tax-free year after year. Over a 20-year holding period, the combination of rental income reinvested into the IRA and property appreciation can produce total returns exceeding most diversified stock portfolios.
However, SDIRA real estate investing is not for every retirement saver. The concentration risk is significant because a single property represents a large percentage of your portfolio. The illiquidity means you cannot easily sell shares to cover Required Minimum Distributions. And the operational complexity of managing compliance, custodian relationships, and UBIT filings is greater than holding index funds.
For investors who combine SDIRA real estate with traditional investments in other accounts, the risk-adjusted returns can be exceptional. If you want to learn how other investors are structuring rental property financing without traditional income documentation, see our guide on how to finance rental property without tax returns using DSCR loans.
What Tax Reporting Is Required for SDIRA Commercial Real Estate?
Self-directed IRA real estate investing creates specific tax reporting obligations beyond what a standard IRA requires. Understanding these requirements upfront prevents surprises and penalties.
The IRA custodian files IRS Form 5498 annually, reporting the fair market value of the IRA's assets including real estate. You are responsible for providing an annual property valuation to your custodian, which typically requires a professional appraisal or a documented valuation method.
If your IRA earns more than $1,000 in gross unrelated business income (which includes UDFI from leveraged property), the IRA must file Form 990-T and pay UBIT. This is due by April 15 of the following year, with extensions available. Many custodians assist with this filing, but you should confirm whether it is included in your fee structure or costs extra.
When you sell the property, the capital gain stays inside the IRA and is not reported on your personal tax return. For a Traditional SDIRA, you will pay taxes only when you take distributions. For a Roth SDIRA, qualified distributions including all accumulated gains are tax-free.
Have questions about structuring a tax-efficient SDIRA real estate investment? Our lending specialists work with SDIRA investors regularly and can help you evaluate the financing side of the equation. Schedule a consultation to get started.
Frequently Asked Questions
Can you buy commercial real estate with a self-directed IRA?
Yes. A self-directed IRA can purchase any type of commercial real estate including multifamily apartments, office buildings, retail centers, industrial warehouses, and mixed-use properties. The IRA is the legal owner of the property, all income flows into the IRA, and all expenses are paid from the IRA. You must use a specialized SDIRA custodian and comply with IRS prohibited transaction rules, which prevent you from personally using or managing the property.
What is the penalty for a prohibited transaction in a self-directed IRA?
The penalty is severe. The IRS does not impose a fine on the specific transaction. Instead, the entire IRA is treated as distributed on January 1 of the year the violation occurred. You owe income tax on the full value of the IRA at your ordinary income tax rate, plus a 10% early withdrawal penalty if you are under age 59 and a half. For an IRA holding a commercial property worth $800,000, this could result in a tax liability exceeding $300,000.
Do you have to pay UBIT on real estate in a self-directed IRA?
UBIT applies only when the IRA uses debt financing (a mortgage) to purchase the property. The portion of rental income and capital gains attributable to the borrowed funds is classified as Unrelated Debt-Financed Income and is taxed at trust tax rates up to 37%. If you purchase the property with all cash from the IRA, UBIT does not apply. As the mortgage balance decreases over time, the UBIT percentage decreases proportionally.
Can you personally manage a property owned by your self-directed IRA?
No. Providing management services to a property owned by your IRA is a prohibited transaction under IRC Section 4975. You must hire an independent, third-party property manager to handle all aspects of property operations including tenant screening, rent collection, maintenance coordination, and lease administration. Even performing minor tasks like mowing the lawn or changing a lock on the property could constitute a prohibited transaction.
What is the difference between a checkbook control LLC and a regular SDIRA?
In a regular SDIRA, the custodian holds the assets and must approve every transaction, which can take 3 to 10 business days. With a checkbook control LLC, the IRA owns 100% of an LLC, and the IRA owner serves as the LLC manager with direct authority to write checks and execute transactions without custodian approval on each action. This provides speed and flexibility for time-sensitive commercial real estate deals but requires higher setup costs ($1,500 to $3,000) and places greater compliance responsibility on the investor.
Whether you are rolling over a 401(k) into a self-directed IRA or exploring non-recourse financing for your next commercial acquisition, our team is here to help. Get in touch to discuss your investment strategy and learn which loan programs fit your SDIRA structure.