How Investors Use Self-Directed IRAs for Real Estate

What every investor needs to know

If you own a self-directed IRA (SDIRA), you already know your retirement account can go beyond traditional stocks, bonds, and mutual funds. Real estate is one of the most popular alternative investments—and for good reason. It offers the potential for long-term appreciation and, in many cases, consistent income.

According to the Investment Company Institute, total U.S. retirement assets exceeded $49.1 trillion at the end of 2025. IRAs accounted for $19.2 trillion, representing approximately 13% year-over-year growth. Within the self-directed IRA segment, data from STRATA Trust Company’s 2025 Self-Directed IRA Investor Survey Report indicates that real estate remains one of the most widely utilized asset classes, reflecting increasing demand for diversification, income potential, and greater control over retirement investments.

However, investing in real estate through an SDIRA comes with a unique set of rules. The margin for error is small, and missteps can lead to serious tax consequences. With the right structure and a clear understanding of the guidelines, real estate can play a valuable role in your retirement strategy.

Ways to hold real estate in an SDIRA

There is more than one way to add real estate to your SDIRA, and the right approach depends on your account balance, investment goals, and comfort level with complexity. Below are the most common ownership structures.

Direct ownership

Direct ownership is the most straightforward method. In this structure, the SDIRA purchases the property outright, and the IRA, not you personally, is listed as the owner on the deed. The title will typically read something like: "STRATA Trust Company for benefit of (FBO) John Doe’s Roth IRA".

Direct ownership works best when the SDIRA has enough cash not only to acquire the property but also to cover ongoing expenses, such as taxes, insurance, and maintenance. Because the IRA must cover all property-related costs, having adequate liquidity is essential.

Financing with a non-recourse loan

If the purchase price exceeds the cash available in your SDIRA, financing may be an option. IRAs are permitted to use non-recourse loans, meaning the lender’s only remedy in the event of default is the property itself. The lender cannot pursue you personally or other assets in your IRA.

While non-recourse financing can allow your SDIRA to acquire higher-value property, it may also generate Unrelated Debt-Financed Income (UDFI). UDFI is a tax that applies to the portion of income attributable to the financed part of the investment. In some cases, the potential benefits of leverage may outweigh the tax impact, but this is an area where professional tax guidance is strongly recommended.

Ownership through an entity

An SDIRA can also invest in real estate indirectly through a pass-through entity, such as a limited liability company (LLC). This approach may offer administrative flexibility, particularly when it comes to paying property-related expenses, but it also introduces added complexity, oversight requirements, and compliance considerations.

It is important to note that not all SDIRA custodians support all types of entity structures. For example, some custodians, including STRATA, may not custody or administer investments held through single-member LLCs. Custodial policies vary, and investors should confirm whether a chosen structure is supported before moving forward.

Because entity ownership can raise legal, tax, and administrative considerations, investors should pursue this option only after consulting qualified legal and tax professionals who understand SDIRA rules, as well as discussing structure requirements with their SDIRA custodian in advance.

How to avoid prohibited transactions

The IRS strictly limits how an IRA may interact with certain people and entities, known as disqualified persons. These include you, your spouse, your parents and grandparents, your children and grandchildren (and their spouses), and any entity you control.

A prohibited transaction (PT) occurs when the IRA engages in self-dealing with a disqualified person. The consequences are severe. The entire IRA is treated as distributed as of January 1 of the year in which the transaction occurs. This results in ordinary income taxes and, if you are under age 59½, an additional 10% early withdrawal penalty.

Because PTs often arise from common, well‑intended actions, it is important to evaluate a potential real estate investment before placing it into your SDIRA. STRATA offers a pre-custody Prohibited Transaction Self‑Check for Real Estate, a simple and practical resource designed to help you identify common red flags and compliance concerns early in the process. Reviewing this self-check can help you spot potential issues and reduce the risk of entering into a prohibited transaction.

To stay compliant, avoid actions such as:

• Buying property from your SDIRA
• Selling personally owned property to your SDIRA
• Using SDIRA-owned property for personal benefit, such as staying in a vacation rental
• Personally performing repairs or maintenance on the property, even without compensation

When it comes to SDIRAs and real estate, good intentions do not override the rules.

→ Pay all expenses from the SDIRA

Every real estate investment comes with expenses. For property held in an SDIRA, common costs may include:

• Property taxes
• Insurance premiums
• Repairs and maintenance
• Property management fees
• Utilities
• Non-recourse loan payments, if applicable

All expenses must be paid directly from SDIRA assets. Paying out of pocket, even temporarily, creates a prohibited transaction. For this reason, maintaining sufficient cash reserves within the SDIRA is critical.

Some SDIRA custodians require you to submit payment authorization requests, after which they disburse funds on behalf of the IRA. Other structures, such as IRA-owned LLCs, may allow authorized signers to pay expenses directly from the entity’s account. Each approach has its own requirements, so it is important to understand how your custodian administers real estate investments.

→ Ensure income flows back into the SDIRA

Just as expenses must be paid by the SDIRA, all income generated by the property must return to the SDIRA. Rental payments should be made directly to the IRA, or its wholly owned entity, not to you personally. You cannot collect rent in your own account and then deposit it into the IRA.

The same rule applies when property is sold. Sale proceeds must be deposited directly into the SDIRA to preserve the account's tax-advantaged status.

Invest with confidence

When handled correctly, real estate can be a powerful addition to your self-directed retirement strategy—offering diversification, income potential, and long-term growth within a tax-advantaged account.

Success comes down to structure, discipline, and compliance. STRATA supports investors with the custody administration and educational resources needed to navigate these rules with confidence.

Whether you’re considering your first real estate investment or evaluating an existing one, taking a proactive approach can help you stay compliant and keep your retirement strategy on track. Learn more about holding real estate within a self-directed IRA.