Self-Directed IRA Real Estate Investing Rules and FAQs | HomeUnion

Many people would like to invest in the real estate market, but have a lot of questions about the best way to do it. They might ask:

  • Do I have to my purchase in all cash?
  • Do I have to buy the property directly, or can I go through a property manager?
  • Where is best to invest my money?
  • What are the tax implications of my earnings or losses?

Many people invest in real estate to build their overall wealth and save for retirement. So why not save for retirement in a tax-beneficial way like other traditional forms of investing? Today, it’s becoming more popular for investors to turn to what’s known as a Self-Directed IRA to purchase and invest in the real estate market.

But what are Self-Directed IRAs? How do they allow you to invest in real estate? And what are the benefits of doing so over other forms of investment in the market?

Understanding what a Self-Directed IRA is, what the benefits are and what the rules and restrictions are is important before putting your money into a fund.

HomeUnion® makes it easy

With a fully managed property purchased through HomeUnion®, you can reap all the benefits provided by single family residential property investing without engaging in the cumbersome managerial aspects that make real estate intimidating for so many investors. While real estate investing using IRAs used to be an undertaking for most self-directed and hands-on investors, HomeUnion® makes it a viable option for anyone with the appropriate means.

Advantages of using your Self-Directed IRA to purchase investment properties

A self-directed IRA (SDIRA) allows an investor to acquire real estate as an asset while keeping the tax benefits of a traditional IRA. SDIRAs make real estate investing an option for investors who want to take advantage of real estate’s return potential, its ability to hedge against inflation and diversify the investment portfolio. Additionally, with the tax advantages of an SDIRA, you might find yourself deferring or otherwise not paying tax on your investments.  

  • Investment properties can yield rental return as well as market appreciation
  • You have control over the properties your retirement account owns
  • You can buy, sell, and exchange properties without tax consequences if not taking a loan
  • You can use a non-recourse loan to finance properties purchased if desired

Self Directed IRA Investing Steps

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What is a Self-Directed IRA?

Much like the more-well-known Traditional or Roth IRA, a Self-Directed IRA is a way to invest money for retirement that can have immense tax benefits. In fact, a Self-Directed IRA is actually a Traditional or Roth IRA that allows a person to invest his or her money in different places than just mutual funds, bonds and ETFs. A Self-Directed IRA allows people to invest in things such as notes, private placements, real estate, precious metals and tax lien certificates, to name a few.

These alternate avenues of investment are what separate a Self-Directed IRA from other IRAs. The firm you choose to use as your retirement account custodian will determine the specific rules and regulations by which you must adhere, in addition to the federal regulations. It’s referred to as self-directed because you, as the account owner, must annually report the value of your account to the custodian, which is much different than other more hands-off approaches to retirement investment.

It’s very important that you do your homework before choosing which custodian you choose for your Self-Directed IRA if you plan to use it to purchase real estate. In addition to rules and regulations you must adhere to, each custodian may have different fee structures or features they provide to make your investment experience better.

One of the standard restrictions for investing in real estate through a Self-Directed IRA is you have to generate enough cash flow through your investments to cover all repair and maintenance costs without having to add cash into the investment each year.

How do I fund my SDIRA account?

There are a few different options to fund your SDIRA account:

  1. IRA-to-IRA Transfer of funds: Complete a transfer form requesting the transfer of funds directly from your original IRA custodian to your new SDIRA account. Include a copy of your most recent IRA statement. Estimated time: 1-4 weeks
  2. IRA Rollover: Request distribution paperwork from your prior 401k administrator. Complete the forms and return to the administrator who will withdraw the funds and transfer directly into your SDIRA account. Estimated time: 2-4 weeks
  3. Contributions: Make a cash contribution into the SDIRA account online, via bank wire or by check. Estimated time: 5 days

When purchasing a property, how do I pay?

You submit a buy direction form to your SDIRA custodian who will then send the funds from your account to the title company, attorney, or escrow agent handling the transaction.

When I purchase a rental property with my SDIRA does the rental income go back into my SDIRA?

Yes. All income from an SDIRA owned property must return to your IRA. This ensures that you retain the tax-deferred or tax-free status of the account.

How do I get rental income?

Rental payments are collected by HomeUnion® and deposited directly into your SDIRA account.

How do I pay for any rehab on an investment property?

Your IRA must pay all expenses associated with a property that it owns, including rehab. Investment properties purchased using an SDIRA cannot benefit from sweat equity either, so you must hire a third party vendor to complete all repairs.

Can I finance an investment property when using an SDIRA?

Yes, you can finance an investment property as long as it falls within certain guidelines.

What type of loan can I get?

IRS regulations require all loans to SDIRA to be non-recourse loans. The lender will be lending solely on the qualifications of the asset, therefore the lender will not check your personal credit or income, and the loan will be in the name of the IRA.

How do I sell a property owned by my IRA?

When you’re ready to sell a property that’s owned by your SDIRA, the SDIRA custodian will sign all the documents once you have approved them. Once the property has been sold, all funds from the sale are deposited into your IRA.

Will I have to pay any taxes on my earnings?

If no loan was used the earnings are tax-free like earnings from any other IRA investment. If financing was used, you may be subject to Unrelated Business Income Tax (UBIT) on the portion of earnings attributed to borrowed money.

What are the benefits of using a self-directed IRA to purchase real estate?

Purchasing real estate through cash or other means can be complicated at times, especially from a tax perspective. If you invest in real estate through cash means, you will have to report your earnings or losses, based on your expenses and income, every year. It is treated as if the income generated were self-employment income that requires you to pay taxes annually.

By purchasing real estate through a Self-Directed IRA, you will be gaining many tax benefits. If you choose to go the Traditional IRA funding route for your Self-Directed IRA, the money you invest will be tax-deferred. This means you will not pay taxes on any of the income from your real estate investments until you make withdrawals from your account in retirement. If you choose the Roth IRA direction, your investment gains will build tax-free, since you will be using post-tax money to make the investment in your Self-Directed IRA account.

No matter which form of IRA you choose, you will be prohibited from withdrawing the funds from your account until you are at least 59.5 years old, unless you want to pay a penalty and include the income on your tax return for doing so. But most people who invest in real estate don’t do so to take the income they generate in the short-term. As such, the tax benefits in this case can be immense.

Other benefits to purchasing real estate through a Self-Directed IRA is you can make multiple purchases and sales of the real estate, moving money from one of your projects to another while still keeping the tax-deferred status of the IRA. In other words, you don’t have to report the income and deal with the taxes each time you make a real estate transaction. Instead, you only have to deal with the taxes associated with all your real estate investments once – either when you invest the money (Roth) or when you withdrawal it (Traditional).

Finally, a Self-Directed IRA allows you to invest your money in real estate outside of your local market with ease. Many real estate investors would stick to their local market because of familiarity, access and/or ease of doing so, but investing through a Self-Directed IRA would allow you to invest in broader markets by partnering with a real estate investment company such as HomeUnion®.

What are some negatives to purchasing real estate with a self-directed IRA?

Like any other retirement investment, there are some drawbacks to purchasing real estate using a Self-Directed IRA, and some things you should be aware of being going this route.

First, while purchasing real estate with a Self-Directed IRA has many tax benefits, not following the rules and regulations could nullify your account’s tax-deferred status. If you don’t follow the rules, and/or if you purchase your real estate investment the wrong way, it could end up disqualifying your IRA from its tax-deferred status, which would force you to pay immediate taxes on the money in the account.

Second, investing in real estate through a Self-Directed IRA will prevent you from taking advantage of some of the other tax perks that are available to most real estate investors. Those who invest in real estate through other means are able to claim depreciation on their properties that operate at a loss, however, this is not permissible in a Self-Directed IRA, since you’re already receiving other tax benefits.

Third, if you intend to purchase your real estate property with the use of a mortgage, you might need to factor in what’s known as unrelated business income tax. There are a number of cases where this might come into play for you, so it is best to do your research on what UBIT is and if it would apply in your situation.

Fourth, you cannot use a Self-Directed IRA to purchase real estate property that will serve as both an investment and a second property or vacation home, for example for you and/or your family. The IRS prohibits Self-Directed IRAs from investing in personal transactions or self-dealing when it comes to purchasing real estate for you and any members of your immediate family. If you do buy real estate through a Self-Directed IRA and then leave it to your family members, for example, doing so will trigger a taxable event.

Finally, in addition to prohibiting you from withdrawing funds from your Self-Directed IRA before the age of 59.5, there is also a requirement to take minimum distributions once you are 70.5 years old. The potential problematic issue with this is it is often very tough to sell off all your property assets little by little over the years. This is another reason why you have to have enough other cash in your Self-Directed IRA account so you can meet the required distribution amount each year to allow you to stay away from tax problems.

Use a Self-Directed IRA to Advance Your Real Estate Investments

The question then becomes is purchasing real estate through a Self-Directed IRA worth it? The easy answer, in most cases, is yes. While you do lose out on the tax benefits of being able to write off depreciation for any of your investments that operate at a loss, that benefit is very small compared to the tax benefits you will receive by investing through an IRA.

If you do your research well, partner with a company such as HomeUnion® that allows you to invest in the best markets with the best opportunities for ROI and the ideal tenant, then operating at a loss won’t be a major part of the equation for you. With that in mind, then, the best-case scenario is to build your wealth through your real estate investments in the most tax beneficial way possible.

By purchasing real estate with a Self-Directed IRA, you will at the very least be able to defer the taxes you invest in the real estate market and the profits you generate until you withdrawal the money in retirement.

For many people, the best route would be to use a Roth form of a Self-Directed IRA to purchase real estate, especially if you anticipate a solid return on investment for a number of years. That’s because with a Roth version of a Self-Directed IRA, you will invest the money into the real estate you buy after you pay taxes on that money. In return, all the money you earn through your real estate investments will grow tax free because you’ve already paid the tax. So, when you go to withdrawal the money from the account in retirement, you won’t need to pay taxes on it.

Whatever form of Self-Directed IRA you choose, purchasing real estate in this fashion could have a profound impact on your tax scenario, while providing you other benefits such as the ability to invest in real estate outside your local market and not having to report your investments, income and losses every time you make a real estate transaction.


HomeUnion® does not provide investment advisory, tax, legal or financial services, and recommends that you consult a licensed real estate, tax, legal, accounting or investment professional to perform an independent analysis before making decisions regarding the purchase or sale of real estate.