Self-Directed IRA Real Estate Investing

Self-directed IRA real estate investing has changed considerably over the past several years. Platforms like EquityMultiple have made it feasible for individual investors to participate in professionally-managed, private market real estate investing at relatively low minimums. Meanwhile, a growing set of self-directed IRA custodians have made the process of accessing platform-based investments smoother, with a varying set of fee structures. Combined, these factors make self-directed real estate investing less cumbersome and more accessible for individuals. 

EquityMultiple has interfaced with numerous IRA custodians in working toward a more efficient workflow for accessing self-directed IRA real estate investing. The EquityMultiple platform allows for creating an IRA account, and our dedicated Investor Relations team is available to guide investors through the process. Read on for FAQs regarding self-directed IRA real estate investing. 

Top Self-Directed IRA FAQs

What is a Self-Directed IRA?

A Self-Directed IRA (SDIRA) is an IRA where the custodian of the account allows the IRA to invest via an asset permitted by law. These investments might include private placements, private securities, real estate, limited partnerships, precious metals, or commodities. Its portfolio options are much broader than underlying eligible securities offered by brokerage firms. A SDIRA can take many different forms (such as Roth, Traditional, or SEP). An investment using a SDIRA will receive the same tax-deferred treatment as a Traditional IRA, such as if you were to invest in a mutual fund via your 401k or brokerage IRA. You do not have to pay any capital gains tax when you buy or sell assets within your traditional IRA. However, distributions are subject to regular income taxes.

What types of Investments can I invest in?

A self-directed IRA can invest in real estate, precious metals, hedge funds, or alternative assets. The only investment restrictions for IRAs are collectible items, life insurance, S-corporation stock, and prohibited party transaction (such as with family members). An IRA may leverage its investment with debt by using a nonrecourse loan to fund the balance of the investment. In the event of a default, under the conditions outlined in the mortgage documents, the lender can foreclose against the property. If an IRA owner engages in prohibited transactions, the investor could be subject to taxes, a 10 percent early withdrawal penalty, and other potential fines and penalties. The IRS is permitted to seize the entire value of your IRA to satisfy any taxes and penalties.

How does a SDIRA invest?

An SDIRA investment must be held in the name of the IRA and executed by the custodian. The IRA custodian (trustee) acts upon the written direction of the IRA owner (beneficiary), sometimes known as an alternative investment buy direction. Typically we see the IRA’s investment held, titled and vested as 123 XYZ Trust Company FBO Samantha Green Roth IRA. At the end of the year when tax documents are issued, a separate box on the K-1 will be checked to denote the SDIRA investment.

How do investors use their SDIRA to invest in EquityMultiple real estate offerings? 

To make a self-directed IRA real estate investment, you need to set up an account with a custodian that allows real estate held in custody. You can rollover funds or fund this SDIRA directly. Once the SDIRA is funded, the next step involves identifying an asset that fits your investment preference. Complete the Subscription Agreement (or Purchase Agreement if buying the asset solely and not via a syndicate). Instruct the custodian of your IRA to complete a written instruction typically known as a buy direction form attesting your (the beneficiary’s) intent to purchase an interest in this investment by the custodian (trust). The custodian will subsequently review the offering material or purchase agreement so that it doesn’t constitute a prohibited transaction. Lastly, the custodian countersigns the documents and wires proceed to the entity formed. Income, rental expenses, and sale from the asset are directed to the SDIRA and not directly to the beneficiary.

Self-Directed IRA Chart

When holding real estate in custody, the IRA owner should limit his or her participation in the investment to administrative or oversight activity. It is not allowable for the IRA owner to physically work on the property.

EquityMultiple welcomes our investors to participate in our offerings via their SDIRA. Below is a list of a few SDIRA custodians we have worked with recently.

This is not an exhaustive list – we have worked with other custodians and continue to interface with quality SDIRA custodians in order to provide the greatest breadth of options to our investors. 

You can create an IRA investment account directly under the “My Accounts” section of your investor portal. Once your IRA investment account is complete, you will be able to make investment requests in our offerings, and we will facilitate the funding process by helping you prepare the necessary paperwork.

If you have a checkbook-access SDIRA (set up as an LLC) you can set up an entity investment account instead.

Understanding UBIT for IRAs

A SDIRA account that invests in a real estate development or for a short term can be subject to Unrelated Business Income Tax (UBIT). UBIT tax typically applies when an IRA receives ordinary income as opposed to passive income from the investment held in custody.

Passive income such as rental income, interest income, dividend income, or capital gain income is exempt and not subject to UBIT. When using the self-directed IRA in a transaction that will trigger the UBIT tax, the IRA is taxed at the trust tax of 10% – 37%. UBIT tax is due if the real estate produces a service or product (for example a restaurant or potentially hotel operations). If the intent was to sell immediately after purchase, then the investment can be subject to UBIT tax. Typically this timeframe is defined as less than one year. The second type of real estate activity that could be subject to UBIT is a development or significant improvements. In this case, a property that goes from land to structure, and sold will be required to pay UBIT tax. 

Valuations and Distributions

An SDIRA’s fair market value must be updated annually by the account holder. The custodian uses this information in their annual reporting of the IRA with the IRS via Form 5498. The reason an IRA custodian is required to receive fair market analysis every year is to assess tax implications in the event of distribution or conversion (with a Roth IRA). The fair market value is an estimate of the market value of an asset, based on a value where the asset would “change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts”, according to the IRS.

Selecting an IRA Custodian

Many of our investors aren’t familiar with self -directed IRAs and inquire if they can invest with their current retirement plan into products other than stocks, bonds, and mutual funds (such as an EquityMultiple asset). Large institutions and retirement accounts do not hold real estate or alternative assets in custody because of the administrative hassle to service the initial investment and ongoing distributions. Larger institutions are incentivized to sell internal investment products that will help profitability. If a financial institution restricts you from holding real estate or alternative investments in custody, this is purely a business decision and not a legal one.

So what should you do if your institution does not allow you to use your retirement account to invest in commercial real estate? Your ability to self direct your investment depends on if you are able to roll over funds into another custodian. If your 401k retirement plan is administered through a current employer who does not accommodate, you will not be able to roll those funds out to an SDIRA unless you leave the company or retire. With an existing IRA with a brokerage or bank, that IRA can always be transferred to a custodian that holds alternative investments such as commercial real estate in custody. It’s worth noting that you can establish a new Traditional or Roth SDIRA and make contributions according to IRS guidelines and limitations.

When evaluating SDIRA custodians, we urge you to review expenses (upfront and ongoing), speed to funding, and customer service.

If you would like to learn more about self-directed IRA real estate investing, or discuss any of our investments, please feel free to reach out at any time by emailing us at

Disclosure: EquityMultiple does not provide tax, legal or accounting advice. 
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax or accounting advice. You should consult your accounting advisor before engaging in any transaction. 

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