A self-directed IRA (SDIRA) is a retirement account that lets the account holder invest in assets beyond stocks, bonds, and mutual funds — including real estate, private notes, precious metals, and private equity. The IRA itself owns the asset; you direct the investments through a specialized custodian.
The IRS retirement plan FAQ covers contribution limits and distribution rules that apply to all IRA types. Self-direction adds a layer of compliance responsibility on the account holder.
How a self-directed IRA differs from a brokerage IRA
| Feature | Brokerage IRA | Self-directed IRA |
|---|---|---|
| Asset choices | Stocks, bonds, ETFs, mutual funds | Real estate, notes, LLC interests, metals, crypto (custodian-dependent) |
| Investment decisions | You select from menu | You source and approve each deal |
| Custodian role | Holds securities | Holds title, processes documents, reports to IRS |
| Due diligence | Fund manager / index | Entirely on you |
Popular SDIRA custodians include firms specializing in alternative assets. The custodian holds title and handles administration — they do not provide investment advice or vet deals.
Buying real estate inside an SDIRA
Real estate is the most common alternative asset in self-directed accounts. Key rules from IRS Publication 590-B:
- The IRA owns the property, not you. Title reads “[Custodian] FBO [Your Name] IRA.”
- All income and expenses flow through the IRA. Rent deposits into the IRA; taxes, insurance, repairs, and property management are paid from it. No commingling personal funds.
- No personal use or sweat equity. You and disqualified persons — spouse, ancestors, descendants, and certain controlled entities — cannot live in, vacation at, or personally work on the property.
- Repairs must be paid by the IRA. Hiring contractors is allowed; doing the work yourself is a prohibited transaction.
Related: purchasing investment properties with your IRA · what is a syndication
Financing real estate in an SDIRA
SDIRAs can borrow to acquire property, but the loan must be non-recourse — the lender’s only remedy is the property itself, not your personal assets or other IRA holdings.
Implications for investors:
| Topic | Detail |
|---|---|
| Loan type | Non-recourse only — most conventional mortgages do not qualify |
| Lender options | Private lenders, select portfolio lenders, SDIRA-specialist lenders |
| Down payment | Typically 30–40% from IRA cash |
| Rates | Often higher than personal investment loans — quote-based |
Jaken Finance Group offers non-recourse investment-property financing on select files for SDIRA-acquired rentals. Ask about DSCR at 5.75%–10.5% on stabilized SDIRA-held property.
UDFI and UBIT tax traps
Two taxes catch SDIRA real estate investors who do not plan ahead:
Unrelated Debt-Financed Income (UDFI). When an IRA borrows to buy property, the debt-financed portion of rental income may trigger UDFI tax. If 60% of the purchase was debt-financed, roughly 60% of net rental income could be taxable inside the IRA at trust rates. Form 990-T may be required.
Unrelated Business Income Tax (UBIT). Applies when the IRA earns income from an active trade or business — certain flip operations, operating businesses, or debt-financed gains on property held primarily for sale.
Work with a CPA experienced in SDIRA taxation before levering a retirement-account acquisition.
Checkbook-control IRA-LLC
Many investors use an IRA-LLC (also called checkbook control) for faster transactions:
- The IRA owns 100% of an LLC
- The LLC holds title and a bank account
- You as manager write checks for approved expenses without custodian approval on each transaction
Setup adds legal and custodian fees ($1,500–$3,500+ typical) and requires strict separation between IRA and personal finances. One prohibited transaction can disqualify the entire IRA — triggering taxes and penalties on the full balance.
Is a self-directed IRA right for you?
Pros: Tax-advantaged growth on real estate, notes, and private deals; portfolio diversification beyond public markets; potential for higher yields than index funds.
Cons: Strict prohibited-transaction rules; custodian fees; non-recourse-only leverage; UDFI/UBIT complexity; full due diligence burden; illiquidity until distribution age.
Before funding a deal, consult a qualified custodian and tax advisor. When the IRA is ready to borrow, ask Jaken Finance Group about non-recourse options on investment property.
Resources: should I hold real estate in an LLC · DSCR loan for investment property · pre-qualify
Self-directed IRA — prohibited transactions investors miss
IRS rules block self-dealing — your SDIRA cannot buy property you personally use or sell to disqualified persons (IRS SDIRA overview).
| Allowed | Prohibited |
|---|---|
| Buy rental in SDIRA LLC | Personal use of IRA property |
| Hire third-party property manager | Pay yourself management fees |
| Non-recourse IRA mortgage (limited) | Recourse loan to IRA (most banks decline) |
Investors who need recourse leverage at 8.99%–13.5% or DSCR at 5.75%–10.5% typically finance personally or in investor LLC, not SDIRA. See purchasing investment property with IRA · investment property LLC loans.
Checkbook IRA vs. custodied SDIRA — control tradeoff
| Structure | Speed to offer | Prohibited transaction risk |
|---|---|---|
| Custodied SDIRA | Slower — custodian signs | Lower if custodian reviews |
| Checkbook LLC | Faster | Higher — self-dealing risk |
Investor leverage outside IRA: 8.99%–13.5% / 5.75%–10.5% in personal LLC. IRA property purchase · IRS SDIRA.
Rates, terms and conditions offered only to qualified borrowers and are subject to change at any time without notice. Closing times are in business days and commence upon satisfaction of borrower conditions. 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