Investing in Real Estate with your IRA or 401k 

Investing in Real Estate with your IRA or 401k 

By: Nate Hare, Directed IRA 

IRAs Are the Most Overlooked Opportunity in Real Estate 

There are over $9 trillion in IRA accounts in the U.S., making them one of the largest pools of investable capital in the world (Investment Company Institute & Federal Reserve Board). What many don’t realize is that IRAs have always been able to own real estate, whether that’s single family rentals, flips, LLCs that own multifamily or commercial real estate, or even private lending. 

So why haven’t you heard of this? Most IRA custodians, typically brokerages and insurance firms, restrict investments to publicly traded assets like stocks and mutual funds. Real estate is deemed “administratively unfeasible” by these firms, which means they simply don’t offer it. That’s where self directed IRA custodians come in. 

Types of Real Estate IRAs Can Own 

IRAs can own rental properties, flips, commercial or multifamily real estate through LLCs, real estate options, and private loans. But the key rule is that assets must be for investment, not for personal use by you or disqualified family members. IRS rules restrict your IRA from transacting with “disqualified persons,” including you, your spouse, parents, children, and their spouses (IRC § 4975). 

What Is a Self Directed IRA? 

A self directed IRA is any IRA (Roth, Traditional, SEP, etc.) that allows investment into any asset permitted by law. While real estate is the most common investment, self directed IRAs also invest in private funds, start ups, notes, precious metals, and cryptocurrency. 

When using your IRA to purchase property, remember: the IRA, not you, owns the asset. All contracts and deeds must be titled in the name of the IRA (e.g., “Directed Trust Company FBO John Doe IRA”). All expenses and income flow through the IRA. 

Using an IRA LLC (Checkbook Control) 

Many investors use an IRA LLC for real estate purchases. Here, the IRA owns the LLC, and the LLC owns the real estate. The IRA owner can be the LLC manager and control a dedicated business checking account. This structure provides control and expedites transactions, but IRA funds must always be used for investment, not personal benefit. Our law firm, KKOS Lawyers, regularly structures IRA LLCs and ensures compliance with IRS requirements. 

Leverage: Nonrecourse Loans and UDFI 

Your IRA or IRA LLC can obtain a nonrecourse loan to buy property. You can’t personally guarantee the debt. The lender’s only recourse is the property itself. Be aware, however, of Unrelated Debt Financed Income (UDFI) tax. This applies to the portion of income attributable to borrowed funds, and tax is owed at trust rates (up to 34 percent). Capital gain income from debt financed property can qualify for long term capital gain rates (up to 20 percent). 

Watch Out for UBIT 

Unrelated Business Income Tax (UBIT) may apply to business income, frequent property flipping, or real estate development. While rental income, capital gains, and loan interest are typically exempt, self directed investors should consult a qualified tax attorney or CPA to navigate these complexities. 

Conclusion 

Learning to self direct your IRA is like learning a new board game. Master the rules first. Once you’ve done it properly, the tax advantages and investment flexibility can dramatically increase your long term wealth. If you are interested in opening a new account use discount code AZREIA150 to get $150 off your first year’s annual fee!