Real Estate

Advanced Approaches to Real Estate Investing with a Self-Directed IRA

Advanced Approaches to Real Estate Investing with a Self-Directed IRA

While total IRA assets reached $16.8 trillion in Q1 2025 (Investment Company Institute), self-directed accounts represent only a small fraction. Many account holders still confine themselves to traditional investments like mutual funds and bonds.

For investors who already understand the basics of SDIRAs, more advanced strategies can open the door to property ownership inside retirement accounts. These strategies, however, come with added rules, costs, and operational complexity. Even experienced investors must take care to balance opportunity with compliance.

This guide explores advanced techniques, oversight responsibilities, and documentation standards that can help keep SDIRA real estate investments both compliant and effective.

Key Takeaways

  • SDIRAs may hold many types of property, but all transactions must avoid dealings with disqualified persons.
  • Financing property often exposes income to Unrelated Business Income Tax (UBIT), lowering net returns.
  • Diversification within an SDIRA can include mixing property types, geographies, and strategies.
  • Maintenance, insurance, and required valuations are ongoing costs that may reduce returns.
  • Fiduciary responsibility means thorough recordkeeping and routing all transactions through the SDIRA custodian.

Why Investors Use SDIRAs for Real Estate

Despite the challenges, some investors choose this route for specific reasons:

  • Broader diversification beyond stocks and bonds.
  • Potential for tax-deferred or tax-free rental income depending on account type.
  • Inflation hedging through ownership of real assets.
  • Greater influence over property selection and management within IRS boundaries.

Permitted Property Types

The IRS allows a wide range of real estate in SDIRAs, as long as assets are strictly for investment and not for personal use. Prohibited assets include collectibles.

Examples of permitted holdings:

  • Residential rental homes
  • Commercial property
  • Raw land or farmland

According to IRS Publication 590-A, real estate is allowed, but the investor, family members, and other disqualified persons may not occupy or directly benefit from the property.

Financing Property and the UBIT Issue

Leverage is sometimes used in advanced strategies to acquire more valuable property. But using debt introduces complications:

Hypothetical Example: If an SDIRA property generates $24,000 in annual rental income, and half is attributable to borrowed funds, that $12,000 portion may be subject to UBIT, reducing the overall tax advantage.

Custodian Responsibilities in Complex Deals

Custodian choice becomes even more important in advanced strategies. A custodian with alternative asset experience can help streamline transactions. Key functions include:

  • Specializing in real estate and other non-traditional assets.
  • Reviewing contracts for compliance and reporting accuracy.
  • Providing support for UBIT filings and, in some cases, foreign property reporting.

The right custodian can help reduce administrative delays and compliance risks.

Diversifying Within an SDIRA

Just as diversification matters in public markets, it also applies to real estate inside an SDIRA:

  • By property type: Residential, industrial, and mixed-use assets can respond differently to economic shifts.
  • By region: Geographic spread reduces exposure to one market’s downturn.
  • By approach: Balancing rental properties that generate income with those aimed at long-term appreciation can help manage risk.

The risk is concentrating too heavily on one familiar area or sector.

Hidden Costs and Recordkeeping Duties

Buying the property is only the start. SDIRA investors must also budget for:

  • Ongoing maintenance and repairs
  • Insurance premiums
  • Property management fees
  • Custodian fees and required valuation updates

All expenses must be paid directly from the SDIRA. Using personal funds—even temporarily—creates compliance risks.

Fiduciary responsibility also requires maintaining detailed documentation of contracts, leases, invoices, and valuations. Custodians or the IRS may request these records at any time.

Compliance Checklist Before a Deal

Experienced investors often confirm these items before closing:

  • Property type is eligible under IRS rules.
  • Seller is not a disqualified person.
  • Financing is structured as non-recourse.
  • All funds for the purchase and upkeep will come directly from the SDIRA.
  • Custodian has reviewed and approved the paperwork.

How to Build the Right Support System for SDIRA Real Estate

Real estate inside a self-directed IRA (SDIRA) can be rewarding, but it’s also easy to run into problems if you go it alone. The safest approach is to surround yourself with the right professionals who understand both alternative assets and IRS rules.

1. Choose a custodian who specializes in SDIRAs
Traditional brokerage firms don’t typically handle SDIRA property ownership. A dedicated custodian is responsible for holding the title in the IRA’s name, processing every purchase or sale, and routing all rental income and property expenses through the account. Without them, compliance breaks down.
Well-known SDIRA custodians include Equity Trust, Inspira Financial, IRA Financial, The Entrust Group, IRA Resources, and uDirect IRA.

2. Bring in a tax professional
The tax side of SDIRA investing is often where investors stumble. A CPA familiar with alternative assets can warn you about prohibited transactions, explain how Unrelated Business Income Tax (UBIT) may apply if you use leverage, and keep your filings in order with the IRS.

Ground Rules You Can’t Ignore

  • No personal benefit: You or family members cannot live in, rent, or vacation at the property.
  • Expenses must come from the IRA: All costs—maintenance, insurance, property taxes—must be paid using IRA funds only.
  • Financing must be non-recourse: If a loan is used, it cannot be backed by personal guarantees. Any income tied to debt may trigger UBIT.

Bottom Line: Investing in real estate through an SDIRA is not a one-person project. It requires coordination between custodians, advisors, and tax experts to keep the account compliant and the strategy effective. The best investors treat professional oversight not as an extra cost, but as insurance against costly mistakes.

Risks and Frequent Pitfalls

Challenges include:

  • Prohibited transactions that can disqualify the IRA.
  • Illiquidity if property must be sold to fund distributions.
  • UBIT liability tied to leveraged investments.
  • Missing or incomplete records that compromise compliance.

Ultimately, the administrative side of SDIRA real estate investing is just as critical as choosing the property itself.

Advanced SDIRA real estate strategies succeed when compliance, financing, property selection, and diversification all align. The most disciplined investors view custodian oversight, documentation, and UBIT awareness as part of their strategy—not as afterthoughts.

SDIRA Real Estate — FAQs

Who qualifies as a “disqualified person” in SDIRA real estate rules?
Disqualified persons include the IRA owner, their spouse, children, or certain related parties. None of these individuals may occupy or personally benefit from the property.
Why must financing in an SDIRA be non-recourse?
IRS rules require non-recourse loans, meaning lenders can only claim the property itself, not other IRA assets. This structure prevents outside collateral from being pledged.
How does Unrelated Business Income Tax (UBIT) apply in an SDIRA?
Rental income or gains tied to the leveraged portion of a property can trigger UBIT, requiring IRS Form 990-T. This can reduce the net tax benefits of an SDIRA.
What role does a custodian play in SDIRA real estate strategies?
Custodians process transactions, hold title in the IRA’s name, and ensure all income and expenses flow through the account. They also review contracts for compliance with IRS rules.
How can diversification be achieved within an SDIRA real estate portfolio?
Investors may diversify by sector (residential, commercial, industrial), by geography (different regions), or by strategy (rental income vs. appreciation). This reduces concentrated exposure.
What common hidden costs can affect SDIRA real estate returns?
Costs include maintenance, insurance, property management fees, custodian charges, and annual valuation reports. All must be paid from IRA funds to stay compliant.
Why must all expenses be paid directly from the SDIRA?
Using personal funds for repairs, taxes, or insurance can be considered a prohibited transaction, risking disqualification of the entire IRA.
What documentation is required for SDIRA real estate compliance?
Investors must keep records of contracts, leases, invoices, expense receipts, and annual valuations. Custodians or the IRS may request proof at any time.
How can overreliance on leverage create tax issues in SDIRAs?
Income from financed property is partially subject to UBIT. For example, if half of rental income comes from leveraged capital, that portion may be taxable.
Why is personal use of SDIRA property prohibited?
IRS rules require the property to be solely for investment. Any personal use, even short-term, is treated as a prohibited transaction and risks disqualification.