Investing in real estate through a Self-Directed IRA (SDIRA) is an option that many retirement savers explore to add diversification and potential long-term growth to their retirement portfolio. Real estate IRAs offer a unique way to hold tangible assets like rental properties, raw land, or commercial buildings inside a tax-advantaged retirement account. But how do you know if this type of investment is right for you?
At Mainstar Trust, we serve as your self-directed IRA custodian—helping you set up and maintain your account while you select from a wide range of allowable assets. Here are some important questions to consider before moving forward with real estate IRA investing.
What Is a Real Estate IRA?
A real estate IRA is a type of retirement account that allows account owners to use their IRA funds to invest in various types of real estate as investment properties, such as:
- Single-family or multi-family rental properties
- Raw land or farmland
- Commercial real estate
- Vacation homes for investment use
- Real estate investment trusts (REITs)
- Real estate-related promissory notes
These investments must be held in a self-directed IRA, which allows for alternative assets beyond traditional mutual funds or ETFs. The account must be managed in accordance with IRS rules, including avoiding prohibited transactions and using a qualified IRA custodian like Mainstar Trust.
Are You Comfortable With the Responsibilities of Real Estate Ownership?
Unlike stocks or bonds, real estate investments often require more hands-on involvement. As the IRA owner, you must ensure that:
- The property is purchased in the name of the IRA—not your personal name
- A non-recourse loan is used if financing is needed
- You do not personally benefit from or use the property
- All expenses (repairs, maintenance, property taxes) are paid from IRA funds
- All income (e.g., rental income) is deposited back into the IRA
Because of these requirements, it’s important to conduct due diligence before investing. You may also consider working with a property manager or forming an IRA LLC to simplify transactions.
Do You Understand the Tax Rules and IRS Limitations?
Real estate investments inside an IRA enjoy tax-deferred or tax-free growth, depending on whether you use a Traditional IRA or Roth IRA. However, there are key IRS rules to be aware of:
- Required Minimum Distributions (RMDs): Traditional IRAs require RMDs starting at a certain age, even if the asset is illiquid
- Prohibited Transactions: Personal use of the property, doing business with a disqualified person, or using personal funds for repairs can trigger penalties
- Unrelated Business Income Tax (UBIT): If your IRA earns income from certain real estate activities, it may be subject to UBIT
Mainstar Trust can support you by providing custodial services and recordkeeping, ensuring your IRA stays in compliance.
Is Your Portfolio in Need of Diversification?
Real estate can serve as a powerful way to diversify your retirement portfolio beyond the traditional stock market. Because it’s a tangible asset, it may behave differently than other securities in your IRA account, offering a hedge against inflation and market volatility. Investors who are seeking the below may find real estate to be a compelling part of their overall retirement plan.
- Stable cash flow from rental properties
- Long-term appreciation
- A physical asset with tax advantages
Do You Have Enough IRA Funds to Purchase Real Estate?
Real estate can be a higher-cost investment. If you don’t have enough in your IRA to purchase the property outright, you may consider:
- Partnering with other IRA accounts or investors
- Using a non-recourse loan (financing not tied to your personal credit)
- Transferring or rolling over funds from another retirement account into your SDIRA
Keep in mind, all purchases and expenses must be paid from the IRA, not from personal accounts, and the property must be titled to the IRA—not the individual.
Common Real Estate IRA Questions
- Can I live in the property?
No. Personal use is prohibited. The property must be strictly for investment purposes.
- Can I use my Roth or Traditional IRA?
Yes. You can purchase real estate using a Traditional IRA, Roth IRA, SEP IRA, or Simple IRA, depending on eligibility.
- What if I want to sell the property later?
All profits from the sale go back into the IRA tax-deferred or tax-free, depending on the type of IRA.
Ready to Set Up a Real Estate IRA?
Real estate investing through a self-directed IRA offers an exciting opportunity to build long-term wealth and diversify your retirement portfolio with alternative investments. With Mainstar Trust as your IRA custodian, you can access a wide range of investment options—from real estate investments and private equity to annuities for retirement savings.
If you’re ready to get started, contact our team today to set up your Self-Directed IRA and start investing in real estate the right way.