Disadvantages of Self Directed IRA Rental Real Estate Investing

Disadvantages of Self Directed IRA Rental Real Estate Investing

Owning rental real estate in a self directed IRA has advantages and disadvantages. Myirahack.com considers some of the more notable disadvantages:











Owning real estate through a self directed IRA entails several tax disadvantages. Property taxes, interest and depreciation are all non deductible to the individual when his/her self directed IRA holds the property. Of course, these benefits might be lost on account of the  IRS’ passive activity loss limitations, so this tax benefit might already be lost for many taxpayers. This analysis can become complex.  The many tax benefits of owning real estate through an IRA, like tax deferral on current and reinvested income, may outweigh the benefits of owning real estate personally.

Disqualified Persons and Benefits

A self directed IRA cannot purchase real estate from either you or any disqualified person. IRS rules forbid you, your son or daughter, parents, parents in law or spouse to sell a property to your self directed IRA.

Real estate held by your self directed IRA cannot benefit you personally in any way. That means you can’t stay in, vacation at, or in any way use a home or commercial property that your self directed IRA owns. Should your self directed IRA conduct any transaction that benefits you or any disqualified person, this may jeopardize your IRA, triggering disastrous tax payments, interest and penalties.


Since an individual and his/her IRA are considered different entities legally and by the IRS, a real estate held by a self directed IRA must be properly titled in the name of your IRA. Custodians typically handle this administrative detail correctly, but know beforehand this important detail.


Borrowing money for a self directed IRA real estate purchase is also more difficult, since any loan in support of a self directed IRA real estate investment must be non-recourse, with no pledging of collateral for the loan or any personal guarantees. Thus non-recourse loans supporting a self directed IRA investment are typically more expensive than conventional real estate investments done personally. Finally, an obscure IRS rule imposes a tax on income a self directed IRA generates using debt financing.  This tax can be costly, almost 40% on income in excess of approximately $12,000.

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