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Self Directed IRA Real Estate

Real Estate in an IRA

Real estate in an IRA provides the opportunity to generate income from rent, appreciation, fixing and flipping, and more.

Your self directed IRA real estate investments can purchase any type of property, such as residential and commercial real estate, raw land, agricultural property, and more. Your self directed IRA can buy the property outright; meaning the IRA is the title holder. If your IRA does not have the funds needed to make a cash purchase, your IRA can partner with another person, company/entity, or another IRA account. Your IRA can also secure a non-recourse loan (see below) to buy property.

Since the inception of IRAs, it has been possible to invest in real estate as an asset. What has not always been easy is finding an IRA provider willing to service self directed IRA real estate investment.

The IRS requires an authorized IRA provider for all IRAs. Although few IRA providers handle real estate investments, New Direction IRA specializes in administrative services for all your real estate IRA investments. You, the IRA holder, select the property, negotiate the terms, and direct us to send funds from your IRA to close the deal. We make sure the paperwork substantiates that the asset is purchased with your IRA, and therefore deserves the tax benefits associated with the account type. Our knowledgeable staff will guide you through the self directed IRA real estate investment process, and ensure that your transactions are prompt and accurate. We offer ongoing free education on Self Directed IRA Real Estate (SDIRA) investing and regulations.

Self Directed IRA Real Estate educational videos

Real Estate IRA

Introduction to Real Estate IRA Basics

Many investors and real estate professionals are unaware that self directed IRA funds can be invested in real estate. Join us for an eye-opening introduction into the world of self directed retirement investing. Learn how IRA and 401(k) funds can participate in real estate investments like rental properties, fix and flips, and even private lending. Walk away from this free presentation with a basic understanding of important factors like IRS rules, personal limitations, partnerships, financing options, and more.

What Are the Benefits of Investing in Real Estate With Your IRA?

  • Real Estate is a tangible asset; you can see it and touch it.
  • IRA Real Estate is an asset that you have experience with and understand.
  • Investment properties can potentially yield a cash stream as well as market appreciation.
  • You have strategic control over the properties that your retirement account owns.
  • You can apply your knowledge and expertise of the real estate market.
  • You can buy, sell and exchange properties without tax consequence.

Important Things to know about Real Estate IRA Investing

  • A self directed real estate IRA is its own financial and legal entity, and it is separate from your personal finances.
  • As a separate legal entity, your IRA has it's own name:
                New Direction IRA, Inc FBO (client name) IRA
  • The IRA is the owner of the real estate, not the IRA holder. Therefore, purchasing and maintenance costs are paid by the IRA, and all income (e.g. rent) goes back to the IRA.
  • All legal documents related to an IRA-owned asset must be in the name of the IRA, not your personal name.
  • For the documents associated with your IRA real estate acquisition to be complete and legal, they need to be signed by New Direction IRA (as the administrator for that account).

IRA qualified person rule

IRS Prohibited Transactions For Self Directed IRA Real Estate

  • Neither the IRA holder nor any disqualified person (learn more) to the Real Estate IRA may live in or use the property.
  • You cannot work on the property yourself, for free or for pay. "Sweat equity" is not allowed. Any remodeling, repair, improvement, and even maintenance must be performed by a paid third party at market rate.
  • Your IRA cannot purchase a property from you or any disqualified person. Similarly, you (or a disqualified person) cannot sell the IRA's property to yourself. This scenario constitutes self-dealing, which is not permitted.
  • Neither you nor a disqualified person can guarantee a loan for an IRA property. This scenario constitutes self-dealing, which is not permitted.
  • If you are a real estate agent and involved in the transaction, you CAN NOT take a commission.

Loans from IRA

Step by Step Guide to Acquire Real Estate in an IRA

Step 1 – Open and Fund your Real Estate IRA – It takes New Direction IRA two business days to open your account once your application is in the office. Then you will fund the account with a rollover, transfer, and/or contribution. This may take several weeks, so plan accordingly.

Step 2 – Find a property and make an offer – The offer needs to be made in the name of the IRA (as it is the buyer) and earnest money needs to come from the IRA or a non-disqualified person.  Do not use your personal funds to pay the earnest money.

Step 3 – Work with your New Direction Client Representative and Acquisitions Specialist to assemble the paperwork for the purchase.  Closing documents must be received by our office at least 3 full business days before the closing date.

Leveraging Real Estate in an IRA

A self directed IRA real estate may acquire a loan to purchase property, but it must be a non-recourse loan (the lender is acknowledging, in the case of default, their only avenue for remuneration is the property itself). Not all lending institutions and banks offer these types of loans, but several do exist. Also, a non-recourse loan can come from a private lender. Learn More about Non-Recourse IRA Loans.

When an IRA purchases real estate using a non-recourse loan, the debt financed portion of the property's net profits may be subject to UBIT. Similarly, if an IRA-owned property is sold while a percentage of ownership is still debt financed, the net profits derived from the debt financed percentage may subject to UBIT. UBIT is paid by the Real Estate IRA and does not affect the IRA holder's personal taxes. Learn more.

Property Management Of A Real Estate IRA

After you have used your self directed IRA to purchase real estate, the IRA holder makes the management decisions. That may include the hiring of a property manager (or other non-disqualified person or entity) to handle the day-to-day cash flow and operations, or you may choose to work directly with New Direction to have vendors and other bills paid. You are allowed to make decisions for your IRA-held asset, but there are limitations that the IRS imposes.

Income generated by the self directed IRA real estate must go back into the IRA. Rent checks are made out to the IRA (or the management company if there is one), not the IRA holder.

You can not pay for any property related expenses with your personal funds on behalf of the Real Estate IRA. All expenses are paid from the IRA.

As the IRA holder, you have the ability to choose tenants, plumbers, repairmen, etc. for your IRA-owned property.

Maintenance and Improvements cannot be performed by the self directed IRA real estate holder or any disqualified person.

Possible Structures For The Purchase Of Real Estate With Your IRA

As mentioned above, there are several ways to have real estate in your IRA:

Hold title to real estate. A real estate contract is written between the IRA (New Direction IRA, Inc FBO (client name) IRA) and the seller. Funds from the self directed IRA real estate are sent to closing for the purchase, and the IRA takes title to the property directly.

Tenants-in-Common with a partner entity. This is one of the ways that an IRA can participate in a real estate asset without necessarily having the entire purchase price. The partner can be a person (even a disqualified person), an IRA, a company, or other entity.

Private Equity in an entity (like an LLC, LP, C-corp., etc.) that then invests in real estate. The asset in your IRA in this case is shares of a private company or private equity in that company. However, the financial return of the investment is based on the performance of the real estate as well as the terms of the agreement with the company.

Loan money to a borrower who uses real estate as collateral. You can think of your IRA as a mortgage lender. Your IRA can lend money to non-disqualified persons and secure the note with real estate holdings and/or other assets if you like. You and the borrower decide on the term, collateral, and the rate.

Learn about New Direction's self directed IRA real estate fees.

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