Many people have questions about the legality and the rules for buying real estate within IRAs and other tax-favored accounts. Below are answers to some of the most frequently asked questions.

Is it really legal to buy real estate in your IRA?

Yes, absolutely! The Internal Revenue Code does not tell you what you can do with your IRA, only what you cannot do. Other than restrictions on purchasing life insurance and most collectibles in your IRA, nearly everything else is fair game. Unless your IRA is self-directed, however, your custodian may not allow investments in real estate. As is pointed out in the “FAQs Regarding IRAs” page on the IRS website (www.irs.gov), “IRA trustees are permitted to impose additional restrictions on investments. For example, because of administrative burdens, many IRA trustees do not permit IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”

Why haven’t I heard of this before?

Most likely, it is simply because custodians for the more traditional brokerage-style of IRA are simply not set up to handle the unique challenges of administering alternative investments like real estate. They are experts at the purchase and sale of securities, not real estate. If you call up one of the major brokerage-style custodians and ask them if you can buy real estate in your IRA, they are likely to respond that “No, you cannot do that.” However, that would only be true for their firm. The custodial account agreement with a brokerage-style of IRA normally restricts the custodian from holding alternative investments such as real estate, even though the law clearly allows it. You need a ‘self-directed IRA’ custodian to purchase alternative assets.

What is the difference between a ‘self-directed IRA’ and a regular IRA?

There is no legal distinction between a ‘self-directed IRA’ and a traditional brokerage-style IRA. All IRAs are created under the same laws. The difference is simply what the account agreement with your custodian allows you to invest in. With a self-directed IRA, you can invest in almost anything other than most collectibles and life insurance contracts. A self-directed IRA gives you the freedom to take control of your retirement and invest in what you know best, including real estate.

Which types of accounts can be self-directed to purchase real estate?

There are seven different types of accounts that can be self-directed. They are traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, Individual 401(k)s, Coverdell Education Savings Accounts (CESAs), and Health Savings Accounts (HSAs). Each account has different features and benefits, and most people qualify for one or more of these accounts.

In what ways can I invest in real estate through my self-directed IRA or other account?

Essentially, almost any way you can purchase or invest in real estate outside of your IRA can also be done within your IRA, with certain restrictions. This includes direct ownership of all types of real estate, including debt-financed property (with some conditions), promissory notes secured by real estate, real estate options, oil and gas investments, ownership through limited liability companies or limited partnerships, purchasing tax lien certificates, joint ventures, foreclosures or other auction property, and almost anything else you can think of.

Written by: H. Quincy Long

H. Quincy Long
H. Quincy Long is the President and founder of Quest IRA, Inc., the premier provider of self-directed IRAs in the country. Mr. Long is a Texas attorney with experience in real estate as well as other areas, and is widely considered to be one of the country's foremost experts on self-directed IRAs and other plans. He is a sought after speaker on the topic of self-directed IRAs nationwide. He has been a closing attorney for a national title company, and has served on the Board of Directors of one of the largest real estate clubs in the nation. As an active real estate investor himself, he understands the needs of his clients.