How to Use a Self-Directed IRA to Buy Rental Properties

Buying a rental property is a big deal. But when you use a Self-Directed IRA to do it, it becomes something more than a deal. It becomes part of a complete retirement strategy. A Self-Directed IRA lets you invest in real estate using tax-advantaged dollars, meaning your rental income and property appreciation stay inside the account. It should do so while being tax-protected and, ideally, growing. If you're a real estate investor looking for long-term wealth, this might be the strategy that fits. Here’s why.

Why Real Estate Works in a Retirement Plan with a Self-Directed IRA

A Self-Directed IRA gives you the freedom to buy real estate directly. You don’t have to go through REITs or mutual funds, as you might when working with a traditional brokerages. That means you get to choose the properties yourself. You can evaluate neighborhoods, analyze rent potential, and make decisions based on your own wisdom and hard-won experience.

The biggest perk? Rental income that flows back into the IRA is tax-deferred if you're using a Traditional IRA—or tax-free if it’s a Roth. You also won’t pay capital gains tax on any appreciation if you sell the property from inside the account. That opens the door to more reinvestment, compounding your returns faster.

Another benefit? Diversification. Most retirement accounts are full of stocks and bonds. Adding real estate gives your portfolio a tangible, inflation-resistant asset class that doesn't always move with the market. These days, runaway inflation is always a fear, which is one reason so many people turn to Self-Directed IRAs to buy more tangible assets and keep them in their retirement accounts.

What You Can and Can’t Do

When you use a Self-Directed IRA to buy a rental property, the account is the owner. That means rent checks go into the IRA, not your personal bank account. Repairs, maintenance, and upgrades will also be paid out of your IRA funds, not your personal bank account.

Additionally, you can’t live in the property, stay in it during vacations, or even rent it to close family. Although that sounds fun, it’s also known as a prohibited transaction, and it could trigger penalties. The IRS wants to keep personal benefit out of your retirement investments. That separation might feel strange at first, but it’s the key to keeping the tax advantages in place.

Getting Started with a Real Estate IRA

To make this work, you’ll need a custodian who allows for real estate purchases. Not every IRA provider does. Once your Self-Directed IRA is open, you can fund it with a contribution or a rollover from another retirement account. Then, when you’re ready to buy, you direct the IRA to make the purchase.

The process involves more paperwork than buying stocks, but it’s straightforward—and the long-term benefits are significant. Many investors even use non-recourse loans to leverage their IRA purchases and expand their real estate holdings faster.

Is It the Right Fit for You?

If you already know real estate—or want to learn—this strategy is worth considering. Self-Directed IRAs give you the control to choose properties, the tax benefits of a retirement account, and the long-term income potential of rentals. You’ll still be the one in charge of making the decisions and using your wisdom as an investor to identify the right opportunities, but you’ll have the freedom to build a retirement plan that works on your terms—with the assets you want to use.

For the right investor, that combination is hard to beat. And if you’re curious about how to get started, American IRA can walk you through the steps. Just give us a call at 866-7500-IRA.