Retirement Funds Can Own Real Estate
Most retirement accounts — 401(k)s, traditional IRAs — limit you to stocks, bonds, and mutual funds. A self-directed IRA (SDIRA) is different: it allows alternative assets including real estate, private notes, and even precious metals.
Patricia had $45,000 in a traditional IRA sitting in a low-yield bond fund. She opened a self-directed IRA through a specialized custodian, rolled over the funds, and used the SDIRA to fund the down payment on a seller-financed duplex. All rent payments now flow back into the IRA — building retirement wealth through real estate instead of Wall Street.
Her net monthly rental income after the seller-financed loan payment: $760. Annualized on a $45,000 deployment: 20.3% cash-on-cash return. Every dollar flows into the tax-sheltered account.
Most people don't know retirement funds can own real estate. I put mine to work at 20% cash-on-cash — inside a tax-sheltered account that grows for decades.
— Patricia, Self-Directed IRA InvestorReal Estate Returns Compounding Inside the IRA
How the SDIRA Real Estate Deal Works
| Item | Value |
|---|---|
| Property type | Duplex (2 units) |
| Purchase price | $165,000 |
| SDIRA down payment (27%) | $45,000 |
| Seller-financed balance | $120,000 at 6% |
| Monthly loan payment | $860 |
| Total monthly rent (2 units) | $2,200 |
| Taxes + insurance | ~$580 |
| Net monthly to IRA | $760 |
| Cash-on-cash return | 20.3% |
All transactions must flow through the SDIRA. The IRA buys the property, receives the rent, and pays expenses. You personally cannot receive rent or pay expenses directly.
No self-dealing. You cannot live in, work on, or personally benefit from the property. It must be an arm's-length investment solely for the IRA's benefit.
Unrelated Business Income Tax (UBIT) may apply if the property is debt-financed inside the IRA. Patricia consulted a CPA to understand UBIT implications on the seller-financed portion.
Prohibited transactions include buying from or selling to family members, hiring yourself as a contractor, or lending IRA funds to yourself.
Key Takeaways
- A self-directed IRA allows retirement funds to own real estate — something most investors never discover inside a traditional brokerage-held IRA.
- All rent flows into the IRA tax-deferred (traditional) or tax-free (Roth SDIRA). The compounding effect of sheltering real estate income is substantial over 20–30 years.
- UBIT (Unrelated Business Income Tax) may apply to debt-financed real estate in an IRA. Consult a CPA who specializes in SDIRA real estate before proceeding.
- The SDIRA custodian must approve and execute all transactions. Choose a custodian experienced with real estate — not all are equipped for it.
- Self-dealing rules are strict. Violating them can result in the IRA being disqualified — a catastrophic tax event. This is an area where professional guidance is essential.
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