Most investors are familiar with holding stocks and mutual funds in an IRA. What’s less widely known is that a specific type of retirement account — a self-directed IRA — can also hold private real estate investments, including LP interests in a real estate syndication. For the right investor, this can be a meaningful way to grow retirement assets in a tax-advantaged environment. Here’s how it works.
What Is a Self-Directed IRA?
A self-directed IRA (SDIRA) functions like a traditional or Roth IRA in terms of tax treatment — but it allows the account holder to invest in a broader range of assets, including private placements, real estate partnerships, and other alternative investments that standard custodians don’t support.
In a traditional SDIRA, contributions may be tax-deductible and growth is tax-deferred — taxes are paid when distributions are taken in retirement. In a Roth SDIRA, contributions are made with after-tax dollars, but qualified withdrawals are tax-free. For long-term investors with a meaningful real estate allocation, the compounding effect of tax-deferred or tax-free growth over time can be significant.
What to Know Before Investing Through a SDIRA
The concept is straightforward, but the rules require careful attention.
You’ll need a specialized custodian. Standard IRA custodians — banks and brokerages — typically don’t support private real estate investments. A self-directed IRA requires a custodian who specializes in alternative assets and is familiar with private placements. Not all custodians are equally experienced, and choosing the right one matters for both compliance and administration.
Prohibited transaction rules apply. The IRS prohibits certain transactions between an IRA and “disqualified persons” — including the account holder and certain family members. Violating these rules can disqualify the entire account, triggering taxes and penalties. Understanding what is and isn’t permitted is essential before proceeding, and this is an area where experienced legal and tax counsel is genuinely important.
UBIT may apply. In some cases, real estate investments held within an IRA can generate Unrelated Business Taxable Income (UBIT) — particularly when the investment involves debt-financed property. UBIT may be taxable even within the retirement account. A CPA familiar with SDIRA investing can help you evaluate this before committing.
Not every deal accepts IRA capital. Some partnerships have specific requirements around investor account types. It’s worth confirming with the sponsor early in the process whether IRA investments are accepted and what documentation is required.
Is It Right for You?
Investing retirement funds in private real estate through a SDIRA is a strategy that works well for some investors and isn’t the right fit for others. It works best when you have meaningful retirement assets, a genuine long-term investment horizon, and a team of advisors — CPA, custodian, and legal counsel — who are experienced with this structure.
If you’re interested in exploring it, start with your CPA and a custodian who specializes in alternative assets. Getting the structure right from the beginning is much easier than trying to correct it later.
Key Takeaways
- A self-directed IRA allows retirement funds to be invested in private real estate, with the same tax-deferred or tax-free treatment as other IRA assets
- Traditional SDIRAs offer tax-deferred growth; Roth SDIRAs offer tax-free growth on qualified withdrawals
- SDIRA investing requires a specialized custodian and strict adherence to IRS prohibited transaction rules
- UBIT may apply to debt-financed real estate held in an IRA — evaluate this with a CPA before investing
- Not every real estate partnership accepts IRA capital — confirm with the sponsor early in the process
Win Coleman, CCIM, is a graduate of East Carolina University where he received his bachelor’s degree in finance. He holds both North Carolina and South Carolina Real Estate Licenses and was awarded the prestigious CCIM (Certified Commercial Investment Member) designation in 2008.
Win served on the board of directors of The Triangle Apartment Association (TAA) where he co-chaired The Independent Rental Owner’s Council (IROC). He is a member of the International Council of Shopping Centers (ICSC), the Triangle Commercial Association of Realtors (TCAR) and the Raleigh Kiwanis Club.
While a specialist in site identification, evaluation and acquisition for investors and businesses, he also has extensive experience in brokerage, leasing, property management and investment sales.
Win assists in managing The Coleman Group, LLC, which owns a portfolio of investment properties, and he is a member of our acquisitions committee. He has lifelong experience and love for historic properties including the one he restored and where he resides in Historic Oakwood in Downtown Raleigh.