Key Points 

• A Self-Directed IRA allows investors to diversify their retirement portfolios by adding alternative assets such as real estate.
• All income from holding real estate in a Self-Directed IRA can grow tax-deferred or tax-free, depending on the type of IRA.
• Adding checkbook control enables investors to manage everyday real estate-related expenses in real time.

If you’re exploring ways to broaden your retirement portfolio, you may have wondered whether real estate could be part of the mix. While standard IRAs and 401(k)s typically limit investments to stocks, bonds, and mutual funds, Self-Directed IRAs (SDIRAs) allow for a wider range of assets, including real estate. Whether it’s a residential rental, commercial property, or a plot of raw land, you can acquire your ideal real estate through an SDIRA to expand your retirement investment portfolio and receive tax advantages.

Why Choose a Self-Directed IRA for Real Estate?

A Self-Directed IRA offers a unique way to incorporate real estate into your retirement strategy, allowing you to diversify with assets outside the stock market and potentially reduce exposure to any potential market fluctuations. With an SDIRA, you can look beyond conventional options, integrating real estate to pursue portfolio stability and potential appreciation over time. This flexibility to select physical assets provides SDIRA holders with control over investments in ways that standard IRAs simply don’t quite support.

Holding real estate in an SDIRA also brings strategic tax advantages. In a Self-Directed Traditional IRA, any potential rental income and property appreciation can grow tax-deferred, allowing these gains to compound without immediate tax impact. Or, with a Self-Directed Roth IRA, you can benefit from tax-free growth, where qualifying withdrawals are tax-free in retirement. These structures offer significant opportunities to maximize the potential net value of real estate holdings over time.

Adding Flexibility with a Checkbook IRA

A type of SDIRA called a Checkbook IRA  brings added control to real estate investing by allowing you to act directly from a dedicated checking account. Set up by forming an LLC or trust owned by your SDIRA, this arrangement lets you handle day-to-day transactions—like paying property expenses or addressing unexpected costs—without filling out extra transaction paperwork. The Checkbook IRA setup enables real-time decision-making, which can be especially useful in a dynamic real estate market.

For active investors, checkbook control not only simplifies managing expenses, but it also reduces the frequency of custodian fees, as transactions are handled directly through the dedicated checking account. By cutting down on intermediary steps, a Checkbook IRA allows for efficient and timely management within a tax-advantaged framework, giving investors the hands-on control needed to respond quickly to opportunities and protect their investments.

How to Purchase Real Estate with an SDIRA

Purchasing real estate within an SDIRA involves a few structured steps to ensure the transaction follows IRS guidelines. The process begins by opening an SDIRA with a regulated custodian like our sister company and SDIRA custodian, Madison Trust. Once the account is open, you can fund it through a transfer or rollover from an existing retirement account, such as an IRA or 401(k), or by making an initial contribution.

If you’re opting for checkbook control, Broad Financial will help establish your LLC or trust. Once the entity is set up, you’ll open a checking account in its name to unlock checkbook control. With these foundational steps complete, you’re ready to identify and invest in suitable real estate, from rental properties to commercial real estate and more. At this point, it’s important to follow IRS compliance guidelines, including restrictions on prohibited transactions (e.g., avoiding property intended for personal use or transactions involving close family members) to keep the account’s tax-advantaged status intact.

Considerations When Using an SDIRA for Real Estate

While real estate within an SDIRA offers compelling benefits, it’s important to consider a few additional factors. First, certain types of income, such as that generated through debt-financed property within an SDIRA, may be subject to Unrelated Business Income Tax (UBIT). This is a tax designed to level the playing field for tax-exempt entities earning income from specific business activities.

While UBIT doesn’t negate the advantages of holding real estate in an SDIRA, understanding its application can help you plan strategically, particularly if you intend to use leverage on a property.

Another consideration is property management. Income and expenses from real estate held in an SDIRA must flow directly through the retirement account. This involves keeping thorough records and handling the financial aspects of the property in accordance with IRS rules. A Checkbook IRA can simplify the process by enabling you to manage property expenses, like repairs or insurance, directly from the dedicated checking account.

Real Estate as a Retirement Strategy

Using a Self-Directed IRA for real estate can open the door to new opportunities all around. Real estate can provide both portfolio diversification and long-term value appreciation, potentially creating a source of retirement income. For those looking to add flexibility, a Checkbook IRA can enhance the benefits of an SDIRA, enabling hands-on management and real-time decision-making. Ready to get started with opening your Checkbook IRA for real estate? Contact us today!