Investing in real estate through an IRA-Self Directed IRA

Self- Directed IRA

A Self Directed IRA is an IRA account which you directly control and direct into investments of your choosing.  Investment Real Estate is one of the more popular options for using a Self-Directed IRA, otherwise known as a Checkbook IRA, Real Estate IRA or Self Directed IRA LLC. The self- directed IRA allows you to invest in real estate, notes, private placements, tax lien certificates and much more. The Self -Directed IRA retains tax-free profits, tax deductions, asset protection and estate planning in the same fashion as your traditional IRA.

Creating a Checkbook/ Real Estate/ Self-Directed IRA LLC:

  1. Create a Self-Directed IRA: choose a company that has experience with these types of IRA’s.
  2. Have your funds rolled from your old IRA account into the newly created self-directed IRA,
  3. Form an LLC (Limited Liability Company)- specially created for the self-directed IRA
  4. Open a bank account in the name of the LLC from which to engage in investment activities – hence the term “Checkbook IRA.”
  5. Direct the self-directed IRA custodian to wire funds from the Self-Directed IRA into the LLC bank account.

Once completed, you, the account holder, acting on behalf of the IRA, may invest into anything allowed by law.  This includes practically everything except collectibles (like art, jewelry, etc) and life insurance. You are allowed to sign all checks and sign all purchase and transaction documents yourself without prior permission from the custodian. The IRA now owns the LLC and the LLC is under the umbrella of the IRA. Therefore all profits are tax deferred.

NOTE: Having “checkbook control” with a Self Directed IRA has distinct advantages over having funds deposited with a self directed IRA custodian.  Many of the most profitable investments such as foreclosure properties and tax liens require immediate action.  The 2-3 day investment review period with a custodian virtually guarantees lost opportunities. Other advantages of the Checkbook Control IRA include asset protection, the ability to more easily partner with others in structured investments, and greatly simplified escrow transactions.


Certain kinds of investments are prohibited in IRAs. These are generally described as “collectibles,” including such items as artwork, antiques, gems, stamps and coins. Real estate is not a prohibited investment. But there’s a completely different rule that may cause a prohibited transaction when you invest your IRA in real estate.

Prohibited transactions : A prohibited transaction occurs when you interact with your IRA in certain ways. Here are some of the things you aren’t allowed to do:

  • You can’t sell property to your IRA, or buy property from your IRA.
  • You can’t loan money to your IRA, or borrow money from your IRA.
  • You can’t use the account, or any part of it, as security for a loan.
  • You can’t receive goods or services from your IRA, or provide goods or services to your IRA.

You aren’t allowed to do any of these things directly or indirectly. That means you can’t avoid this rule by having your IRA deal with a company you own, or with a family member. And these are outright prohibitions: they aren’t allowed even if you do everything in a fair and reasonable manner.

Example: Suppose you have your IRA buy a broken-down property and fix it up so the IRA can sell it at a profit. That seems like a great way to add value, but if you personally do the remodeling work, or do it through a relative or a business you own, the IRS may say you’ve made a prohibited transaction because you’re providing services to the IRA.

Ugly result: What happens if you have a prohibited transaction in your IRA? It’s almost unbelievably bad. The IRA is considered terminated as of the first day of the year in which the prohibited transaction occurred. Here’s what that means:

  • You have to pay tax on the same amount of income as if you withdrew the entire balance of your IRA.
  • If you’re under 59½, you have to pay the 10% early distribution penalty on that income.
  • You lose the benefit of having that money in your IRA for all the years you would have retained it for your retirement.

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