Purchasing investment property with a self-directed IRA (SDIRA) lets you hold real estate inside a tax-advantaged retirement account — but the rules are strict. The IRA owns the asset, not you. Every dollar of income and expense flows through the account, and prohibited transactions can disqualify the entire IRA.
This guide walks through acquisition workflow, financing limits, and tax traps. Full SDIRA overview: what is a self-directed IRA.
Step-by-step: buy rental property with your IRA
| Step | Action |
|---|---|
| 1 | Open SDIRA with a custodian that allows real estate |
| 2 | Fund the account (contribution, rollover, or transfer) |
| 3 | Identify the property — no personal use |
| 4 | Direct custodian to purchase in IRA name: “[Custodian] FBO [Your Name] IRA” |
| 5 | All closing costs paid from IRA cash |
| 6 | Hire property manager — you cannot self-manage or do sweat equity |
| 7 | All rent deposited to IRA; all expenses paid from IRA |
The IRS prohibited transaction rules bar dealings between the IRA and disqualified persons — you, your spouse, ancestors, descendants, and entities they control.
Cash purchase vs. leveraged IRA acquisition
All-cash IRA purchase is simplest — no UDFI tax, no non-recourse lender required. The IRA must hold enough cash for purchase, closing costs, reserves, and early operating expenses.
Leveraged IRA purchase uses non-recourse debt — the lender’s only remedy is the property. Conventional mortgages with personal recourse do not qualify.
| Factor | All-cash | Non-recourse leverage |
|---|---|---|
| UDFI tax | None | On debt-financed income portion |
| Down payment | 100% from IRA | 30–40% from IRA typical |
| Rates | N/A | Higher than personal investment loans |
| Lender pool | N/A | Private lenders, select portfolio lenders |
Jaken Finance Group offers non-recourse investment-property financing on select SDIRA files. Ask about DSCR at 5.75%–10.5% on stabilized IRA-held rentals.
UDFI tax on leveraged IRA real estate
When an IRA borrows to buy property, the debt-financed portion of rental income may trigger Unrelated Debt-Financed Income (UDFI) tax. If 60% of the purchase was debt-financed, roughly 60% of net rental income could be taxable inside the IRA.
File Form 990-T when UDFI exceeds $1,000. Work with a CPA experienced in SDIRA taxation before levering a retirement-account acquisition.
Checkbook-control IRA-LLC workflow
Many investors use an IRA-LLC for faster transactions:
- IRA owns 100% of a newly formed LLC
- LLC holds title and a bank account
- You as manager (not owner) execute approved transactions
- Property purchases close in the LLC name with IRA funds
Setup costs $1,500–$3,500+ for legal and custodian fees. One prohibited transaction — paying a personal expense from the LLC account — can disqualify the entire IRA.
Prohibited transactions that kill IRA deals
- Personal use — you or disqualified persons living in or vacationing at the property
- Sweat equity — you personally repairing, managing, or improving the property
- Commingling — paying IRA expenses from personal funds (or vice versa)
- Buying from disqualified person — purchasing property you or family already own
- Self-dealing — IRA lending to your operating business
Penalties include disqualification of the IRA — full balance taxed as distribution plus potential 10% early withdrawal penalty if under age 59½.
Worked example: Indianapolis duplex in SDIRA
| Line item | Amount |
|---|---|
| IRA cash available | $95,000 |
| Purchase price | $165,000 |
| Non-recourse loan (40% down) | $99,000 from IRA + $66,000 loan |
| Monthly rent (both units) | $1,850 |
| Monthly PITIA | ~$1,320 |
| Net to IRA (before UDFI) | ~$530/mo |
| UDFI taxable portion (~40%) | ~$212/mo of net |
Compare personal ownership: DSCR loan for investment property at 5.75%–10.5% with full depreciation and expense deductions on your personal return — different tax treatment entirely.
SDIRA vs. personal entity ownership
| SDIRA ownership | Personal LLC ownership | |
|---|---|---|
| Tax on rental income | Tax-deferred/ Roth-free | Schedule E on personal return |
| Financing | Non-recourse only | Full lender market |
| Management | Third-party PM required | Self-manage allowed |
| Depreciation benefit | Inside IRA (limited UDFI impact) | Directly on your return |
| Exit | Distribution or sell within IRA | Sell, 1031, or refi freely |
Resources: should I hold real estate in an LLC · what is a syndication · pre-qualify non-recourse
This content is general information, not tax or legal advice. Consult a qualified CPA and attorney before purchasing property with IRA funds.
IRA real estate purchase — financing gap
Most banks will not lend to an IRA — loans must be non-recourse and few lenders offer them. Practical paths:
| Path | Leverage | Complexity |
|---|---|---|
| All-cash in SDIRA | None | Prohibited transaction risk if self-dealing |
| Non-recourse IRA mortgage | ~50%–65% LTV | Limited lenders, higher rate |
| Personal/LLC finance | 8.99%–13.5% / 5.75%–10.5% | Standard investor products |
Many investors hold rentals in LLC personally and keep IRA for passive notes/funds. Self-directed IRA · investment property LLC · DSCR hub.
Rates, terms and conditions offered only to qualified borrowers and are subject to change at any time without notice. All loans are subject to full underwriting for loan approvals. Jaken Finance Group only finances non-owner occupied investment properties.
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Jaken Finance Group, 2300 Barrington Road, Suite 400, Hoffman Estates, IL 60196