Self-Directed IRA Real Estate Investing Guide

What Is a Self-Directed IRA for Real Estate Investing?

A self-directed IRA (SDIRA) is a tax-advantaged retirement account that allows investors to purchase real estate, private equity, and other alternative assets that conventional IRAs prohibit. Unlike standard IRAs held at brokerage firms, a self-directed IRA is managed through a specialized custodian or trust company that permits alternative investments, including commercial real estate properties.

With a traditional SDIRA, contributions may be tax-deductible and gains grow tax-deferred until withdrawal. With a Roth SDIRA, contributions are made with after-tax dollars, but all future growth and qualified withdrawals are completely tax-free. For commercial real estate investors, this distinction matters because property appreciation and rental income compound without annual tax drag.

The IRS does not restrict what assets an IRA can hold. It only restricts what it cannot hold: life insurance, collectibles, and S-corp stock. Real estate is explicitly permitted. However, the account holder must follow strict rules about prohibited transactions, disqualified persons, and financing structures. Violating these rules can disqualify your entire IRA, triggering immediate taxes and penalties.

If you are considering using retirement funds for commercial acquisition loans or stabilized properties with permanent financing, understanding SDIRA mechanics is essential before committing capital.

How Does a Self-Directed IRA Purchase Real Estate?

Buying real estate through a self-directed IRA requires careful coordination between the custodian, the IRA owner, and any financing sources. Every dollar spent on the property must come from the IRA, and every dollar earned must return to the IRA.

Step 1: Open and Fund the SDIRA. Select a custodian that specializes in real estate. Transfer or roll over funds from an existing IRA, 401(k), or other qualified plan. Contribution limits for 2026 are $7,000 annually ($8,000 if age 50 or older), though rollovers have no dollar limit.

Step 2: Identify the Property. Locate an investment property that meets your criteria. The property cannot be one you currently own, live in, or use for business. It must be purely an investment held for the benefit of the IRA.

Step 3: Direct the Custodian. Submit a buy direction letter to your custodian specifying property details, purchase price, and closing timeline. The custodian holds legal title on behalf of the IRA.

Step 4: Fund the Purchase. The custodian wires funds from your IRA directly to the title company. If using financing, the loan must be a non-recourse loan in the name of the IRA, not the account holder.

Step 5: Manage Ongoing Operations. All expenses (property taxes, insurance, repairs, management fees) must be paid from the IRA. All rental income flows back into the IRA. The account holder cannot perform property management or maintenance work personally.

For value-add opportunities, bridge loan programs can provide short-term financing within an SDIRA structure, provided the loan meets non-recourse requirements.

What Are the Prohibited Transaction Rules for SDIRAs?

Prohibited transaction rules are the most critical compliance area for SDIRA real estate investors. The IRS defines prohibited transactions under IRC Section 4975 as any direct or indirect transaction between the IRA and a "disqualified person." Violations result in the entire IRA being treated as a distribution, triggering income taxes plus a 10% early withdrawal penalty if you are under age 59.5.

Disqualified persons include:

• The IRA owner and their spouse
• The IRA owner's parents, grandparents, children, grandchildren, and their spouses
• Any entity owned 50% or more by a disqualified person
• The IRA custodian, trustee, or any fiduciary of the IRA

Common prohibited transactions in real estate:

• Buying property from yourself or a family member
• Living in or vacationing at the IRA-owned property
• Using IRA property as an office for your business
• Personally guaranteeing a loan for the IRA
• Paying yourself for property management or maintenance
• Commingling personal funds with IRA funds for property expenses

What is permitted: The IRA can transact with unrelated third parties freely. You may hire third-party property managers, contractors, and service providers. You can invest alongside your IRA through separate accounts, as long as each investment is made at arm's length.

Our guide on entity structuring for commercial real estate covers LLC formations that work within retirement account rules.

How Do You Choose an SDIRA Custodian for Real Estate?

Selecting the right custodian is one of the most important decisions in SDIRA real estate investing. Custodians vary widely in fee structures, processing speed, real estate expertise, and service quality.

Fee Structure. Custodian fees fall into three categories: account setup fees ($50 to $300), annual maintenance fees ($200 to $600 per asset), and transaction fees ($50 to $250 per transaction). Some custodians charge percentage-based fees on account value, which becomes expensive for high-value properties. Flat-fee custodians are generally more cost-effective for real estate.

Real Estate Expertise. Choose a custodian with specific experience handling real estate transactions. They should understand title procedures, non-recourse lending requirements, and property expense management. Custodians focused primarily on stocks often struggle with real estate transaction timelines.

Processing Speed. Real estate transactions are time-sensitive. Your custodian must process buy direction letters, wire funds, and execute documents within your closing timeline. Ask about average turnaround time for investment directives.

Checkbook Control Option. Some custodians support a checkbook control LLC structure, where the IRA owns an LLC and the account holder manages it as a non-compensated manager. This provides faster transaction execution without waiting for custodian approval on every expense.

What Is a Checkbook Control LLC and Should You Use One?

A checkbook control LLC is an advanced SDIRA strategy where your self-directed IRA forms a single-member LLC, with the IRA as the sole member. The IRA owner serves as a non-compensated manager and gains direct access to a business checking account, eliminating the need to contact your custodian for every purchase or expense payment.

How it works: Your SDIRA custodian holds the IRA, which owns 100% of the LLC membership interest. As LLC manager, you write checks and make wire transfers directly from the LLC bank account. All real estate is titled in the LLC name.

Advantages: Immediate access to funds for time-sensitive opportunities, faster property acquisitions, simplified expense management, reduced per-transaction custodian fees, and greater privacy since the LLC name appears on public records instead of the IRA.

Disadvantages: Higher setup costs ($1,500 to $3,000), greater personal responsibility for compliance, no custodian oversight on individual transactions, state LLC fees ($50 to $800 annually), and easier to make compliance mistakes without custodian review.

Who should use checkbook control: Experienced investors managing multiple properties or making frequent transactions benefit most. First-time SDIRA investors should start with standard custodian-directed transactions until comfortable with prohibited transaction rules.

Have questions about structuring your SDIRA real estate purchase? Contact Clearhouse Lending to discuss financing options for retirement account investors.

What Taxes Apply to SDIRA Real Estate Investments?

While SDIRAs offer significant tax advantages, real estate investments can trigger two special taxes: Unrelated Business Income Tax (UBIT) and Unrelated Debt-Financed Income (UDFI). Understanding these taxes before purchasing leveraged property prevents costly surprises.

UBIT applies when an IRA earns income from an active trade or business. For real estate, this primarily affects properties where the IRA provides substantial services to tenants beyond basic management. Examples include furnished short-term rentals with concierge services and hotels. Standard long-term rental income is generally exempt from UBIT because it qualifies as passive rental income.

UDFI applies when an IRA uses debt financing to purchase property. The portion of income and capital gains attributable to the leveraged portion is subject to UDFI tax. If your IRA buys a $1 million property with $400,000 in IRA funds and a $600,000 non-recourse mortgage, approximately 60% of the net income would be subject to UDFI.

UDFI calculation example:

• Property purchased for $1,000,000 with $600,000 mortgage (60% leverage)
• Annual net rental income: $80,000
• UDFI taxable portion: $80,000 x 60% = $48,000
• After the $1,000 specific deduction: $47,000 taxable at trust rates (up to 37%)

Mitigation strategies: Purchase properties with all cash to avoid UDFI entirely, or accept the tax as a cost of leveraged returns. Always consult a tax professional specializing in retirement accounts before structuring leveraged IRA investments.

For broader tax context, see our capital gains tax guide.

What Are Non-Recourse Loan Requirements for SDIRA Properties?

When an SDIRA uses financing, the loan must be non-recourse. A personal guarantee on an IRA loan constitutes a prohibited transaction because the IRA owner is extending credit on behalf of the IRA.

What non-recourse means: The lender's only remedy in case of default is to seize the property. The lender cannot pursue the IRA owner personally or go after other IRA assets. This limits risk recovery to the property's value, which is why non-recourse lenders charge higher rates and require lower LTV ratios.

Typical non-recourse IRA loan terms:

• Loan-to-value: 50% to 65% (compared to 75% to 80% for conventional loans)
• Interest rates: 1.5% to 3.0% above conventional commercial rates
• Amortization: 20 to 30 years with 5 to 10 year balloon terms
• Minimum loan amount: $50,000 to $100,000
• Prepayment penalties: Common in the first 3 to 5 years

Qualifying factors: Lenders evaluate the property's income potential rather than the borrower's personal financials. Key criteria include DSCR (typically 1.20x minimum), property condition, location, tenant quality, and IRA liquid reserves. Use our DSCR calculator to evaluate whether your target property meets lender requirements.

Investors comparing structures should understand how non-recourse IRA loans differ from conventional DSCR loan programs available outside retirement accounts.

What Types of Real Estate Can an SDIRA Hold?

Self-directed IRAs can invest in nearly every category of commercial real estate, subject to prohibited transaction rules. The IRS does not restrict property types. The key requirement is that the property serves as a pure investment and is not used personally by the IRA owner or any disqualified person.

Eligible commercial property types:

• Multifamily Apartments. Popular for SDIRAs due to stable cash flow and professional management availability. Properties with 5 or more units diversify income and reduce vacancy risk.
• NNN Retail and Office. Tenants handle most operating expenses, simplifying management within the IRA structure.
• Industrial and Warehouse. Strong demand fundamentals and lower management intensity make these well-suited for SDIRA ownership.
• Self-Storage Facilities. High cash flow margins and relatively simple operations make self-storage a growing SDIRA category.
• Vacant Land. SDIRAs can purchase undeveloped land for future appreciation, though carrying costs must be paid from IRA funds with no rental income to offset them.
• Real Estate Notes. The SDIRA can be the lender, holding mortgage notes and earning interest income rather than owning physical property.

Properties to avoid in an SDIRA: Vacation homes, properties requiring extensive owner-managed renovations, properties without available third-party management, and speculative developments requiring capital calls that may exceed IRA funds.

For investors considering a 1031 exchange as an alternative, note that exchanges defer taxes on existing property gains, while SDIRAs create a tax-advantaged structure for new investments using retirement funds.

What Are the Contribution Limits and Funding Strategies?

The annual IRA contribution limit for 2026 is $7,000 ($8,000 for individuals age 50 or older). These limits alone are insufficient for most real estate purchases, making rollovers and transfers the primary funding mechanism.

Direct Rollover from 401(k). When leaving an employer, you can roll your 401(k) balance directly into an SDIRA without tax consequences. There is no dollar limit on rollovers, making this the most common way to accumulate sufficient capital.

IRA-to-IRA Transfer. Transfer funds from an existing traditional IRA to a self-directed IRA custodian. This trustee-to-trustee transfer has no tax implications and no annual limit.

Roth Conversion. Converting traditional IRA funds to a Roth SDIRA triggers income tax on the converted amount but allows all future real estate gains to be withdrawn tax-free in retirement.

Spousal Co-Investment. Spouses can each maintain separate SDIRAs and co-invest in the same property through a tenancy-in-common structure, effectively doubling available capital.

Solo 401(k) Alternative. Self-employed individuals without W-2 employees can establish a solo 401(k) with contribution limits of $69,000 in 2026 ($76,500 for those 50 or older), plus the ability to borrow from the plan.

Ready to explore financing options for your SDIRA real estate investment? Contact Clearhouse Lending to discuss non-recourse loan programs tailored to retirement account investors.

What Mistakes Should SDIRA Real Estate Investors Avoid?

Self-directed IRA real estate investing offers powerful tax advantages, but mistakes can be catastrophic. A single prohibited transaction can disqualify your entire IRA, creating an immediate taxable distribution of the full account value.

Mistake 1: Performing sweat equity. You cannot personally repair, renovate, or manage an IRA-owned property. All labor must be performed by unrelated third parties paid from IRA funds. Even painting a single wall constitutes a prohibited transaction.

Mistake 2: Using personal funds for IRA expenses. If the IRA lacks cash for a property tax bill or emergency repair, you cannot cover it personally. The IRA must have adequate reserves. Mixing personal and IRA funds is a prohibited transaction.

Mistake 3: Signing a personal guarantee on IRA debt. All loans on IRA property must be non-recourse. A personal guarantee disqualifies the entire IRA in the year the guarantee is made.

Mistake 4: Transacting with disqualified persons. Buying property from parents, hiring a child's company for repairs, or leasing IRA property to your business are all prohibited.

Mistake 5: Ignoring UDFI tax obligations. Leveraged SDIRA properties generate UDFI, and the IRA must file Form 990-T and pay the tax. Failure to file results in penalties and interest.

Mistake 6: Inadequate reserves. IRA-held properties need cash reserves for vacancies, repairs, and operating expenses. Without sufficient reserves, you may be forced to sell at an unfavorable time.

Frequently Asked Questions About Self-Directed IRA Real Estate?

Can I use a self-directed IRA to buy commercial real estate?

Yes. A self-directed IRA can purchase any type of commercial real estate, including multifamily, retail, office, industrial, and self-storage properties. The IRA custodian holds title on behalf of the account, and all income and expenses flow through the IRA. The property must be a pure investment with no personal use.

How much money do I need in my SDIRA to buy real estate?

Most custodians require $25,000 to $50,000 minimum. For all-cash purchases, you need the full purchase price plus 10% to 15% for closing costs and reserves. With non-recourse financing at 50% to 65% LTV, a $500,000 property requires $175,000 to $250,000 in IRA funds plus reserves.

Can I live in a property owned by my self-directed IRA?

No. Living in, vacationing at, or using an IRA-owned property for personal purposes is a prohibited transaction. This applies to the IRA owner, their spouse, parents, children, and grandchildren. Violation results in full IRA disqualification and immediate taxation.

What happens if my SDIRA property needs expensive repairs?

All repair costs must be paid from IRA funds. If the IRA lacks cash, you can make annual contributions within limits, but this may not cover large expenses. Maintaining adequate cash reserves is essential for SDIRA property ownership.

Can I manage an SDIRA-owned property myself?

No. The IRA owner cannot provide services to the IRA, including property management, maintenance, or leasing. You must hire an unrelated third-party property manager. You can direct investment strategy but not perform operational tasks.

Is a Roth or traditional SDIRA better for real estate?

A Roth SDIRA is generally more advantageous because all appreciation and rental income can be withdrawn tax-free in retirement. However, you pay income tax on Roth conversions upfront, so the decision depends on your current tax bracket versus your expected retirement bracket.

How does a self-directed IRA compare to a 1031 exchange?

A 1031 exchange defers capital gains tax when selling one property and purchasing another. An SDIRA provides a tax-advantaged wrapper for new investments using retirement funds. They serve different purposes and some investors use both strategies.

Can my SDIRA invest alongside other investors?

Yes. Your SDIRA can participate in joint ventures, tenancy-in-common arrangements, or syndications, provided no disqualified persons are involved. The SDIRA's ownership must be proportional to its capital contribution, and all returns must flow back proportionally.

Sources and References?

1. IRS Publication 590-A and 590-B (Contributions to and Distributions from Individual Retirement Arrangements), defining IRA rules, contribution limits, and distribution requirements.

2. IRC Section 4975 (Tax on Prohibited Transactions), the statutory foundation for prohibited transaction rules and disqualified person definitions.

3. IRS Form 990-T Instructions (Exempt Organization Business Income Tax Return), governing UBIT and UDFI reporting requirements for IRA trusts.

4. Department of Labor Advisory Opinion 2006-01A, addressing the use of checkbook control LLCs within self-directed retirement accounts.

5. ERISA Advisory Council Report on Self-Directed Plans (2014), examining regulatory considerations and investor protection in self-directed retirement accounts.

Ready to put your retirement funds to work in commercial real estate? Contact Clearhouse Lending today for expert guidance on non-recourse financing and SDIRA-compatible commercial loan programs.