How to Improve Your Real Estate Returns With Your Self-Directed IRA

The more money people make, the more they lose it to inflation, taxes, mismanaged investments, market movements, and so on – it’s a known fact. When it comes to wealth creation and preservation, real estate is one of the finest ways to pass on wealth through generations. By investing in real estate, you not only own a physical asset and earn the rental income you can also create a steady source of income for your retirement through careful planning. This article talks about how you can give a boost to your real estate returns using your self-directed IRA.

What Is a Self-Directed IRA?

A self-directed IRA (SDIRA) is a traditional or Roth IRA, where you can hold a variety of alternative investments, including real estate, that you cannot own in a regular IRA. Generally, self-directed IRAs are available through only specialized firms that offer SDIRA custody services.

Investing in Real Estate Using a Self-Directed IRA

The first step of buying real estate using a self-directed IRA is to set up the account. There are quite a number of companies that offer you (an investor) the ability to set up a self-directed account on your own. That said, there are a lot of complexities involved in this process. The proper way is to have the best custodian that will provide you with the guidance you need as you work your way through the IRS. A value-added fund targeting strategic industrial properties in the greater Pacific Northwest with a primary focus on the Seattle & Portland MSA could be a great opportunity to diversify your portfolio.

Benefits of Buying Real Estate Using Self-Directed IRA

  1. Have control of your financial future

A self-directed IRA allows you to take charge of your own financial future. With the help of a trusted accountant and your real estate IRA, you can make the right financial decisions to meet your financial goals.

  1. Increased ROI potential

The SDIRA allows you to invest in alternative assets. This means you have the flexibility regarding your risk-taking capabilities and the potential for a higher ROI.

  1. Protect against economic fluctuations

The stock market is volatile; the best thing that you could do to protect your wealth is to diversify your investment portfolio. A self-directed IRA gives you the freedom to invest in alternative assets, including real estate, helping you in the diversification of your portfolio.

How to Boost Real Estate Returns?

Along with the benefits of a self-directed IRA, you can also invest inside of a Roth IRA. In Roth self-directed IRA, your contributions are tax-deductible, and the distributions are tax-free when you retire. Additionally, most real estate investment transactions that are done inside of a Roth self-directed IRA do not attract tax, thus allowing you to claim the returns entirely. However, a few exceptions may be applicable.

Self-Directed IRA Rules for Real Estate

  • You cannot own the property.
  • You cannot have indirect benefits, such as renting the garage apartment in the property owned by your self-directed IRA.
  • You cannot use your IRA to buy a property that is owned by you or a “disqualified person.”
  • The title of the property must be unique. This means you and your IRA have to be two separate entities.
  • Your IRA investments that use financing require you to pay Unrelated Business Income Tax (UBIT).
  • Any IRA-owned property expenses, such as maintenance fees, property taxes, utility bills, etc. must be paid from the IRA.
  • You can combine your funds to purchase real estate in your self-directed IRA.
  • Any income earned from your self-directed IRA-owned real estate must be returned to the IRA.

Risks of Self-Directed IRA & How to Avoid Them

Risk 1: Not performing your due diligence

How to Avoid:

  • Research the current real estate market trends and analyze the likelihood of future growth and property appreciation.
  • Seek the help of a trusted professional if you are not a savvy real estate investor.

Risk 2: Lack of real estate diversification

How to Avoid:

  • Diversify your investment portfolio.
  • Invest in multiple versions of the different types of real estate.
  • Also, consider liquidity when using your self-directed IRA to make real estate investments.

Risk 3: High amounts held in SDIRA attracts fraud promoters, who might engage you in a Ponzi scheme or other fraudulent conduct.

How to Avoid:

  • Verify the accuracy of all information within each SDIRA statement.
  • Do not fall victim to unsolicited investment offers.
  • Ask questions and if the person refuses to answer the questions, take it as a red flag.
  • When in doubt, don’t hesitate to ask a professional for help.

Self-Directed Tax Pitfall

The biggest benefit of owning a self-directed IRA is the taxes. But, if you are not careful enough to follow the rules, your self-directed IRA can be disqualified. And this can be a taxable event. Moreover, if your IRA-owned real estate investment is operating at a loss, you may lose tax breaks; you cannot claim depreciation on an IRA-owned real estate property.

While you invest in real estate using your self-directed IRA, keep in mind that tax rules change in the blink of the eye. Therefore, it is always a great idea to check with your trusted financial expert to begin your journey towards a diversified investment portfolio that helps you save tax, save costs and increase wealth.


About the author:

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He regularly writes for blogs at MoneyForLunch, Biggerpocket, SocialMediaToday, NuWireInvestor & his own blog for Self Directed Retirement Plans. If you need help and guidance with traditional or alternative investments, email him at or visit


TAGS: Real Estate Education


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