How to invest in real estate with a Self Directed IRA

A self-directed IRA is like other IRAs in every respect, except that it allows account holders to direct their own investments. You can buy and sell investment real estate for yourself while deferring the tax consequences. And you can earn commissions helping investor clients buy and sell real estate through their self-directed IRA.

The IRS allows you to use retirement money to buy real estate in any form: raw land, condos, office buildings, and so on. For example, you can buy raw land, develop it and then sell each property, or sit on the land for years while it appreciates and then sell as raw land to developers.

Please note, that in most cases the money used to maintain or develop the property must also come from the IRA. For rentals, all maintenance and improvement costs, taxes, insurance, and property management fees must be paid from the IRA, and all rental income must go back to the IRA. For raw land, all development costs must come from the IRA.

Once you sell the property, all proceeds go back into your IRA, where the money continues to grow tax-deferred. You can even sell the investment property and offer seller financing in which you act as the bank, but again all proceeds have to go backing to the IRA.

If you are the investor, you cannot manage your own investments. You will need to obtain a custodian will require a qualified third-party manager. But there is nothing to say you cannot manage the properties of investor clients you’ve worked with. Custodians typically require that any real estate purchased through an IRA be bought outright with no debt financing. In addition, the property must be used for investment purposes only and can’t be used personally while maintained in the IRA.

If you are thinking about starting a self directed IRA, please contact a licensed financial planner before doing so. This article touches only on the general concepts and you will still need to complete all your due diligence.