By: William Hinder, EA | September 25th, 2025
Real estate and retirement accounts are two of the most powerful wealth-building tools available. So on the surface, buying property inside an IRA might sound like the ultimate tax-advantaged investment strategy.
But here’s the truth most investors never hear:
Owning real estate inside a self-directed IRA can create more problems than profits.
In this guide, we’ll break down the hidden tax consequences, the restrictive IRS rules, the liquidity challenges, and the financial planning risks that come with using a self-directed IRA for real estate investing. By the end, you’ll fully understand why this strategy isn’t the golden ticket it appears to be.
Real estate, outside of a retirement account, is already incredibly tax-efficient. As a traditional investor, you can typically deduct:
Depreciation
Insurance
Maintenance and repairs
Management fees
Operating losses
But when the property is owned by a self-directed IRA, all of these benefits disappear.
You cannot:
Deduct depreciation
Claim losses
Use rental property losses to offset other income
Why? Because the IRA—not you—owns the asset.
The tax code doesn’t allow you to personally claim deductions on IRA-held property.
So instead of stacking tax advantages, you’re actually canceling them out, which makes placing real estate inside an IRA a poor tax strategy.
Once you reach your 70s, you must take Required Minimum Distributions (RMDs) from your pre-tax IRA—including a self-directed IRA.
If most of your IRA value is tied up in a single property, you might not have enough liquid cash to cover those RMDs. That can force you to:
Sell the property
Sell it at the wrong time
Trigger significant taxable income
Being forced to sell because of RMD rules is one of the fastest ways to jeopardize your retirement stability—especially during down markets.
Most people using a self-directed IRA to buy real estate end up with a huge portion of their retirement savings tied up in one property.
That exposes them to:
Tenant problems
Market downturns
Expensive repairs
Regional economic risks
Prolonged vacancy
This level of concentration dramatically increases portfolio risk. It undermines diversification—the very thing IRAs are designed to help protect.
One of the biggest advantages of real estate is cash flow—income you can use to live, invest, or grow your wealth long before retirement.
But inside a self-directed IRA:
You legally can’t use that income
You can’t receive rental payments personally
You can’t benefit from the property’s cash flow
You must wait until age 59½ to access funds without penalties
For investors who want to enjoy passive income before retirement, using a self-directed IRA removes one of real estate’s greatest benefits.
Traditional IRAs contain liquid investments like stocks and bonds. If you need cash, you can sell with a click.
A property inside a self-directed IRA? Not so simple.
Real estate is:
Slow to sell
Expensive to sell
Difficult to value
Highly sensitive to market conditions
By placing an illiquid asset inside a self-directed IRA, you risk creating liquidity problems that can impact your entire retirement strategy—including RMDs, emergencies, or market downturns.
This is where most investors get burned.
The IRS has strict guidelines for self-directed IRAs, and one mistake can cause the entire account to become taxable.
Prohibited transactions include:
Personal use: You or certain family members can’t stay at the property—ever.
Sweat equity: You can’t make repairs or improvements. Even tightening a leaky faucet is prohibited.
Commingling funds: You cannot pay expenses personally. All income and costs must flow through the IRA.
Breaking any of these rules can disqualify the IRA and trigger significant taxes and penalties.
Managing compliance is one of the biggest—and most overlooked—downsides of using a self-directed IRA for real estate.
Leverage is one of real estate’s greatest wealth-building tools—but not inside a self-directed IRA.
You cannot:
Use a traditional mortgage
Provide a personal guarantee
Use your own credit
Instead, you must use nonrecourse financing, which often requires:
Higher interest rates
Larger down payments
Stricter qualification rules
Even worse, any income or gains tied to debt may trigger UBIT (Unrelated Business Income Tax)—an unexpected tax that catches many self-directed IRA investors by surprise.
This significantly reduces returns and defeats one of real estate’s biggest advantages.
Traditional custodians like Fidelity or Schwab don’t allow real estate in IRAs. You must find a self-directed IRA custodian, which typically means:
Higher account fees
More paperwork
No investment guidance
More opportunities for accidental IRS violations
More administrative burden on you
One mistake, and you risk the tax status of your entire IRA.
A self-directed IRA gives you more flexibility—but also far more risk.
Real estate is an incredible wealth builder.
IRAs are an incredible retirement tool.
But combining them through a self-directed IRA often removes the tax advantages, increases your investment risk, and introduces complex IRS rules that most investors are unprepared for.
It’s like buying a sports car and then only being allowed to drive 30 mph.
For most people, keeping real estate and retirement accounts separate maximizes flexibility, tax planning opportunities, and long-term wealth.
If you want a complete road map to early retirement that includes tax planning, investment strategy, safe withdrawal modeling, and pre-59½ income design—I can help.
📊 Let’s create a retirement plan that helps you invest smarter, lower taxes, and make work optional.
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