How a Self-Directed IRA Works For Real Estate

By April 8, 2016 Blog 3 Comments

Bill has $150,000 in his current Roth IRA at a national bank. Bill has watched his gains in the IRA go up and down over the last two years. He would like something with more security. Bill’s good friend who is a realtor asks him if he has ever heard of a self-directed IRA. He also tells Bill that he can use the self-directed IRA to invest in alternative investments such as real estate. Bill was unaware that real estate could be held in an IRA.real-estate-investing-self-directed-ira

Real estate is currently low in terms of price for the region Bill wants to invest in, so he believes it is a suitable time to buy. Bill opens a self-directed Roth IRA at Preferred Trust Company and transfers a portion of his funds from his existing Roth IRA from his bank into his new account. Bill begins to do some research and uses his self-directed IRA to invest $100,000 in a project: the builder has 5 acres and will be building 25 homes on the land.

Because the retirement account is investing in the project, it will be titled in the name of that IRA. All income and expenses associated with both assets flow directly into and out of that tax-sheltered account.

The interest from the borrower is deposited into his self-directed Roth IRA. The approximate gain of $12,000 is tax-free, allowing Bill considerable capital to reinvest in a new venture. With this new self-directed IRA, Bill now has the freedom and control to invest real estate the way he wants to.


  • Brad Zasio says:

    Can I use my broker directed IRA to pay off my mortgage penalty/ tax free.?

    • Izzy says:

      Hello Brad, the simple answer to your comment is you can’t use your IRA to pay off your own personal mortgage as that would be a direct benefit to you. One option is you could request a distribution and use those funds to pay your mortgage, but unfortunately that would be a taxable event and possibly an additional penalty for early withdrawal depending on your age.

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