A Self-Directed IRA (SDIRA) lets retirement funds buy real estate, with a custodian handling the account and paperwork while the investment income stays inside the IRA. The trade-off is simple: more choice, more rules, and a sharp penalty risk if you cross prohibited-transaction lines.

Quick Summary: How It Works

A Self-Directed IRA for real estate follows a simple lifecycle: you fund the account, the custodian completes the purchase and holds the property under the IRA’s ownership, a third-party manager handles day-to-day operations, and then rent income and future sale proceeds flow back into the IRA. The investment stays inside the retirement account structure until you take distributions under IRA rules, so the exit is handled as an IRA-owned sale with proceeds returning to the IRA. Prohibited transaction rules still shape every stage, since personal use or other self-dealing activity can trigger severe tax consequences.

The IRA is the owner on title, not you personally.
Expenses must be paid from IRA funds, and income must be deposited back into the IRA.
Personal use and other prohibited transactions can disqualify the IRA and create a deemed distribution.
If financing is used, it is typically non-recourse and may introduce UBIT/UDFI concerns.

Why Investors Use SDIRAs for Real Estate

Investors use SDIRAs to hold assets that sit outside the usual stock-and-bond menu, while still keeping the IRA’s tax-advantaged structure around gains and income until distributions occur. For a traditional IRA, taxes on earnings are generally deferred until distributions, which can make long holding periods feel calmer when rents rise and values compound.

Real-world motivation often looks like this: a long-term rental throws off steady rent checks, and those checks land in the IRA instead of a personal bank account, building retirement buying power for the next deal. Others look at a slow-but-steady parcel of land, a small neighborhood retail unit, or a property in a market they understand, and they prefer a tangible asset they can underwrite with local knowledge.

Consideration #1: Eligible Property Types

SDIRAs are used for many real estate categories, but “allowed” in practice still means the custodian can administer the asset and the deal can be structured without prohibited transactions. Common categories investors target include residential rentals, commercial buildings, raw land, and fractional interests, as long as the IRA is the true owner and the use stays strictly investment-focused.

Typical property directions include:

Residential: single-family rentals, small multifamily, condos used only as rentals.
Commercial: office, retail, industrial units with third-party tenants.
Land: infill lots, agricultural land leased to third parties, long-term holds.
Indirect real estate: some investors prefer pooled vehicles instead of a deed in the IRA, which can simplify operations and valuations.

A practical lens helps: direct ownership means the IRA deals with closing, title, bills, and vendors; indirect options reduce day-to-day friction but may add sponsor fees and less control.

Consideration #2: Ownership & Titling Rules

The IRA must be the buyer and the owner on title, because the asset is held inside the retirement account, not personally. Many custodians provide a standard titling format similar to “Custodian Name FBO (for benefit of) Client Name IRA,” and they sign documents on behalf of the IRA.

A “checkbook IRA” structure often uses an IRA-owned LLC to speed up payments and reduce custodian touchpoints for routine bills. Even with an LLC, the same prohibited-transaction framework still applies, so faster check-writing does not change the need for arm’s-length behavior.

Consideration #3: Prohibited Transactions

Prohibited transactions are transactions between the IRA and a disqualified person, including certain family members and fiduciaries. The IRS describes prohibited IRA activity as improper use of the IRA by the owner, beneficiary, or any disqualified person, and it lists examples such as borrowing from the IRA, selling property to the IRA, using the IRA as security for a loan, and buying property for personal use.

Common real estate traps include:

Living in the IRA-owned property, even for a weekend, because that turns an investment into personal use.
Selling a property already owned personally into the IRA, which is an example of selling property to the IRA.
Letting the IRA purchase a vacation home intended for future retirement living, because “present or future” personal use is specifically flagged.
Providing services that blur into self-dealing, where the investor’s actions create personal benefit tied to the IRA asset.

The penalty risk is not mild: if the owner or beneficiary engages in a prohibited transaction during the year, the account stops being an IRA as of the first day of that year, and it is treated as distributing all assets at fair market value.

Consideration #4: Funding and Transactions

Funding typically comes from contributions, rollovers, or transfers, and the right mix depends on IRA type, timelines, and tax posture. Rollovers and transfers are popular for larger purchases because annual contributions may be too small to cover down payments, reserves, and closing costs.

If leverage is used, IRA real estate financing is typically non-recourse, meaning the lender’s remedy is tied to the property rather than a personal guarantee by the IRA owner. That leverage can create UDFI exposure and may lead to UBIT, so the debt decision is not only about returns but also about after-tax results inside the IRA.

Consideration #5: Property Management & Expenses

All property expenses must be paid from the IRA, and all income must return to the IRA, which keeps the account activity clean and documentable. Vendors are generally paid by the IRA (or IRA LLC if used), and mixing personal funds with IRA bills can create compliance risk and messy records.

Hands-on owners often hire third-party property managers so rent collection, repairs, and tenant coordination stay clearly separated from personal activity. This separation also makes it easier to show that the property is operated for investment purposes rather than personal benefit.

Consideration #6: Valuation & Appraisals

IRA reporting typically requires a fair market value figure, and real estate holders commonly update values on a recurring basis using third-party support. Investors often rely on an appraisal, broker price opinion, or comparable-sales analysis, depending on what the custodian accepts and what fits the property type.

The clean habit: keep valuation documents in the same folder as insurance, lease agreements, and year-end statements, because retirement accounts run on paper trails.

Consideration #7: Tax Implications & UBIT (Unrelated Business Income Tax)

UBIT can appear when an IRA earns unrelated business income, and one real estate trigger is debt-financed income tied to leverage. When an IRA buys property using a non-recourse loan, the portion of income and gains attributable to the financed portion can be treated as UDFI under IRC Section 514 concepts discussed by SDIRA custodians and lenders.

In plain terms: leverage may boost ROI, but it can also pull part of the deal into a tax zone, with the IRA paying the tax from IRA funds. This is why some investors prefer all-cash SDIRA rentals for simplicity, while others accept UBIT exposure as the “price” of scaling faster.

Consideration #8: Exit Strategies & Timelines

Selling inside the SDIRA usually means the IRA is the seller, proceeds return to the IRA, and distributions happen later under IRA distribution rules. For traditional IRAs, required minimum distributions begin at age 73 under current rules described in IRS guidance, which can affect timing if the property is illiquid and cash is needed for RMDs.

Strategy examples that match the structure:

Sell and hold cash inside the IRA for future purchases, keeping the account liquid for upcoming RMD years.
Refinance with non-recourse debt only after modeling UBIT exposure and cash flow.

Consideration #9: Professional Guidance & Custodian Selection

A custodian’s job is administration, reporting, and holding the asset in the IRA structure, so the right fit often comes down to process speed, document requirements, asset experience, and fee clarity. The IRS prohibited-transaction framework is unforgiving, so guidance from a tax professional and an SDIRA-experienced real estate attorney can help spot disallowed structures early.

Custodian checklist:

Experience with real estate closings and “FBO” titling workflows.
Clear transaction fee schedule and annual account fees.
Support for property-related payments, or support for an IRA LLC structure if used.

Consideration #10: Due Diligence & Risk Management

SDIRA real estate due diligence looks like standard real estate underwriting, plus retirement-account compliance hygiene. Title review, insurance coverage, and vendor selection matter more because a bad repair bill or a vacancy hits the IRA directly, and cash calls are not solved by swiping a personal card.

Risk management habits that fit SDIRA ownership:

Keep larger cash reserves inside the IRA to cover repairs, taxes, and vacancies.
Screen for environmental issues and local compliance burdens that can create expensive surprises.

A Case Study

Assume a traditional SDIRA buys a rental for $120,000 cash, plus $4,000 closing costs paid by the IRA, for a total IRA outlay of $124,000. The property nets $900 per month after property management and routine expenses, and the $10,800 annual net income flows back into the IRA rather than to the investor personally.

Over 5 years, net income totals $54,000, and the property sells for $150,000 with $9,000 selling costs, leaving $141,000 flowing to the IRA from the sale. In this simplified picture, total value back to the IRA is $195,000 ($54,000 net rents + $141,000 net sale proceeds) on $124,000 invested, and taxes on the traditional IRA’s gains are generally deferred until distributions rather than assessed each year like a taxable account.

Ready to Invest in Real Estate with Your SDIRA?

Want a second set of eyes on an SDIRA real estate deal, titling format, and a compliance-safe checklist? Share your target property and timeline via the contact form to schedule a free consult.