There are three basic ways to purchase real estate with a self-directed IRA:

  1. Purchase with cash
  2. Partner with family, friend, or business associate
  3. Borrow money for investment

1) Purchase with Cash – The Most Straightforward Approach

If you have sufficient funds in your self-directed IRA to cover the purchase price, closing costs, taxes, insurance, etc., you can purchase a property outright. All ongoing expenses are paid in total from your self-directed IRA, and all income/profits are returned in total to the IRA.

2) Partner with Family, Friend, Business Associate

If you don’t have enough funds for a cash purchase, your self-directed IRA can purchase an undivided interest in a property.

For example, your self-directed IRA could partner with a family member, friend, or business associate to purchase a property for $100,000. The friend could provide 70% of the purchase price ($70,000), and your self-directed IRA could purchase the remaining 30% ($30,000).

All ongoing expenses must be paid in relation to your percentage ownership. In our example, for a $1,000 property tax bill, the friend would pay $700 (70%) of the bill and your self-directed IRA would pay $300 (30%).

Likewise, if the property collected monthly rent of $1,000, the friend would receive $700 (70%) and your self-directed IRA would receive $300 (30%).

3) Borrow Money (Receiving a Loan) for Investment:

An IRA may obtain financing (loan/mortgage) for a real estate investment. However, you must be aware of two points when considering this option:

  • Loan must be non-recourse – Per IRS regulations, an IRA cannot guarantee a loan or be used as collateral. A non-recourse loan only uses the property for collateral. In the event of default, the lender can collect only the property and cannot go after the IRA itself.
  • Tax is due on profits from leveraged real estate – If your IRA uses debt financing (i.e., obtains a loan) on a real estate investment, a tax will probably be due on profits. This tax is called unrelated business income tax (UBIT).