Self-Directed IRA Real Estate Investing

Market Context

How Self-Directed IRAs Work

A self-directed IRA is a standard IRA held with a custodian that allows alternative assets — including real estate, notes, and private equity — rather than only stocks and mutual funds. All income from IRA-owned real estate flows back into the IRA tax-deferred (Traditional IRA) or tax-free (Roth IRA). You do not pay capital gains tax when you sell, as long as the money stays in the IRA.

The Rules You Must Follow

• No self-dealing: You cannot live in, use, or personally benefit from the IRA-owned property
• No disqualified persons: Family members cannot live in or use the property either
• All expenses paid by the IRA: Repairs, taxes, insurance — all must come from IRA funds, not your personal account
• All income to the IRA: Rent checks go to the IRA, not to you personally

UBIT — The Hidden Tax

If your SDIRA uses debt financing to buy real estate, the leveraged portion of income may be subject to Unrelated Business Income Tax at trust tax rates — potentially 37%+. Many investors use SDIRAs only for all-cash real estate purchases to avoid UBIT. Consult a CPA familiar with SDIRA regulations before using leverage inside a retirement account.

When SDIRA Real Estate Makes Sense

SDIRA investing makes the most sense for Roth IRA holders with large balances, long time horizons, and access to all-cash deals in stable markets. The tax-free compounding of a Roth IRA on real estate returns over 20+ years can produce substantial wealth. The complexity and illiquidity mean this strategy is best suited to experienced investors who understand the rules thoroughly.

Dan White is a licensed Virginia real estate agent at Pearson Smith Realty and founder of FreeDealCalc.com. He has been investing in Northern Virginia real estate for 20+ years.