What is a self-directed IRA?
A self-directed IRA is a retirement account that gives the account holder more control over their investment choices. With a self-directed IRA, you can invest in a wider range of assets beyond traditional stocks and bonds. This includes investments such as real estate, precious metals, and private equity.
There are a few key things to know about self-directed IRAs before investing:
You will need to choose a custodian for your account who will facilitate your investments and handle the administrative tasks associated with the account.
You will be responsible for doing your own due diligence on any investments you make through your self-directed IRA.
There are some prohibited transactions that you cannot engage in with a self-directed IRA, such as using the account to purchase property for personal use or investing in a business that you are involved with.
Buying real estate inside an SDIRA
Real estate is the most common alternative asset investors hold in a self-directed IRA. A few rules define how it works:
- The IRA owns the property, not you. Title is held in the name of the IRA (e.g., “[Custodian] FBO [Your Name] IRA”), and every dollar flows through the account.
- All income and expenses run through the IRA. Rent is deposited into the IRA; taxes, insurance, and repairs are paid from it. You cannot commingle personal funds.
- No personal use or “sweat equity.” You and other disqualified persons (spouse, parents, children, and certain entities) can’t live in, vacation at, or personally renovate the property.
Two tax traps to plan around
- UDFI on leveraged real estate. If the IRA borrows to buy property, the debt-financed portion of the income can trigger Unrelated Debt-Financed Income tax. IRA real estate loans must also be non-recourse — the lender’s only remedy is the property itself.
- UBIT can apply to certain active or business-type income inside the IRA.
Custodian and due diligence
You must use a self-directed IRA custodian that allows alternative assets; they hold title and handle administration, but they don’t give investment advice — the diligence is entirely yours. Many investors also use a checkbook-control IRA-LLC for faster transactions, which adds setup complexity.
Is it right for you?
A self-directed IRA can diversify a retirement portfolio into real estate, private equity, and other alternatives with tax-advantaged growth. The trade-offs are stricter rules, custodian fees, non-recourse-only leverage, and full responsibility for compliance. Work with a qualified custodian and tax advisor before funding a deal. When the IRA is ready to borrow, ask us about non-recourse investment-property options.
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 receipt of appraisal payment and satisfaction of borrower conditions. Closing times may be delayed due to appraiser property access . 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