Updated
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 hard money on select SDIRA files for fix-and-flip and bridge — not DSCR rental loans inside the IRA. For a rental hold, finance in an LLC on DSCR at 5.75%–10.5%. IRA flips: hard money for self-directed IRA.
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.
Contribution room is not the same as buying power
The IRS announced the 2026 IRA contribution limit in a newsroom release. The annual IRA limit rose to $7,500, from $7,000. The catch-up for people age 50 and over rose to $1,100, from $1,000. A person who is 50 or older can add $8,600 of new contributions in 2026 if they are eligible to contribute. That sum does not buy a rental. It is the new-money cap for the year. A rollover from another retirement account is a different transaction. This note does not state a rollover ceiling.
Publication 590-B (2025) says you can take distributions after age 59½ without the 10% additional tax, and that distributions are not required until age 73. Real estate inside the account is hard to split into a cash distribution. Plan for liquidity before that required-distribution year. The same publication says a distribution of taxable amounts before age 59½ is generally an early distribution, and the 10% additional tax applies to the taxable part, with listed exceptions.
Prohibited transactions, from the publication
Publication 590-B describes a prohibited transaction as any improper use of the IRA by you, your beneficiary, or any disqualified person. Disqualified persons include your fiduciary and family members: spouse, ancestor, lineal descendant, and any spouse of a lineal descendant. The publication’s examples include borrowing money from the IRA, selling property to it, using it as security for a loan, and buying property for personal use now or later.
The IRS prohibited-transaction topic lists acts between a plan and a disqualified person. Those acts include selling, exchanging, or leasing property. They include lending money or extending credit. They include furnishing goods, services, or facilities. A personal guaranty is an extension of your credit to the account. That is why a recourse promise from the IRA owner does not fit the examples. A deeper fact pattern is in prohibited transactions on an IRA property loan.
If you or your beneficiary engage in a prohibited transaction during the year, Publication 590-B says the account stops being an IRA as of the first day of that year. The assets are treated as distributed at fair market value on that first day. Gain above your basis is taxable. If you own more than one IRA, only the IRA that participated loses IRA status.
If someone other than the owner or beneficiary engages in the prohibited transaction, the publication says that person may owe a 15% tax on the amount, plus a 100% additional tax if it is not corrected. The owner who caused the account to cease being an IRA is not the person described in that 15% sentence.
Unrelated business income and the debt ratio
Publication 590-B says an IRA is taxed on unrelated business income if it carries on an unrelated trade or business. That means a trade or business regularly carried on by the IRA, or by a partnership it belongs to, and not substantially related to the IRA’s exempt purpose. If unrelated trade or business gross income is $1,000 or more, the IRA files Form 990-T. A calendar-year IRA files by April 15 after the year closes. The trustee may file the form. The publication points to Publication 598 for the unrelated-business rules. The edition opened here is Publication 598 (03/2021).
Publication 598 says debt-financed property, in general, is property held to produce income, including gain on a sale, for which there is acquisition indebtedness at any time during the tax year. On a sale, the look-back includes the 12 months before the disposal date. The income included is proportionate to the debt. The debt/basis percentage is average acquisition indebtedness divided by average adjusted basis, and it cannot exceed 100%. That percentage applies to gross income from the property. Deductions directly connected to the property are scaled by the same percentage.
Illustration. These are round figures, not a filed return.
| Line | Amount |
|---|---|
| Average adjusted basis | $200,000 |
| Average acquisition indebtedness | $80,000 |
| Debt/basis percentage | 40% |
| Gross rent | $18,000 |
| Rent included before deductions | $7,200 |
| Directly connected deductions | $10,000 |
| Deductions allowed at 40% | $4,000 |
| Net amount in the illustration | $3,200 |
The 40% figure is $80,000 ÷ $200,000. Included rent is 0.40 × $18,000. Allowed deductions are 0.40 × $10,000. The $3,200 is $7,200 − $4,000. A tax adviser applies the form to the real basis, debt, and expenses. The percentage is not a guess based only on the down payment.
Borrowing inside the account, and borrowing outside it
The loan to the IRA has to leave the lender with the property, not with your personal signature. Jaken Finance Group quotes non-recourse hard money on select IRA files inside the same 8.99%–13.5% band used for fix-and-flip and bridge. A complete file in that band can close in 7–10 business days. Leverage still stops at the lower of 100% of cost and 75% of ARV on a flip, for 6–12 months. Many custodians will require a larger cash cushion than that maximum. The custodian’s limit controls if it is tighter.
A rental you want on a long amortization usually sits better in an investor LLC, outside the IRA. That DSCR loan prices at 5.75%–10.5%, closes in about 14 business days, and can reach 85% on a purchase, 80% on cash-out, and 85% on rate-and-term. It is a recourse-style investor loan to the borrower the application names. It is not an IRA asset unless the structure was built that way with the custodian. Read hard money for a self-directed IRA before you title the deed.
Call (833) 264-7776 and tell the desk the title will read in the custodian’s name. Choose the loan type after the custodian confirms it will sign. Holding the same house in an LLC, outside the retirement account, is covered in LLC loans for investment property.
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