Self-Directed Real Estate IRAs

Beware These Myths About Self-Directed Real Estate IRAs

When it comes to Real Estate IRAs, many people have a lot of strong opinions, and not all of those opinions are on solid footing. This leads to the rise of myths about Self-Directed Real Estate IRAs. To help you better understand what’s going on, we thought we would tackle some of these myths and address the reality underneath them.

Myth #1: Real Estate IRAs are Only for Very Sophisticated Investors

Reality: What is “sophisticated” by this standard? It might seem like it’s a truthful statement on its surface but when you dig deep, you’ll find out this statement doesn’t really hold much weight. There’s no objective measurement as to what makes an investor “sophisticated,” after all. Doesn’t an investor with a lot of experience in real estate become “sophisticated” at it? Even if they don’t necessarily have a lot of formal education?

Once you dive deeper into the statement itself, you’ll realize there isn’t really much there. Yes, it’s important that a serious Real Estate investor works with Self-Directed IRA custodians and the right tax professionals to ensure everything is done the right way. But beyond that, there’s no “sophistication test” you have to take to get started.

Myth #2: Self-Directed Real Estate IRAs are Their Own Account Type

Reality: Although “Real Estate IRA” is a nickname for a type of account, it doesn’t mean there’s officially a “Real Estate IRA” on the books like there is a Roth IRA. Many people use this term as shorthand for any IRA in which an investor places real estate assets. That’s all it is. It typically means that you’re using a Self-Directed IRA, which is an important piece of the puzzle to understand; with a Self-Directed IRA, you’ll have wide access to all sorts of potential investment assets, including real estate.

Once you understand that a “Real Estate IRA” is really just any type of IRA that you self-direct for the purposes of investing in real estate, you’ll see how flexible your options can be. It can include holding a Self-Directed Traditional IRA, SEP IRA, Roth IRA, and more. And once you see that this is the case, it can open up all sorts of possibilities for the way you go about building your retirement nest egg.

Myth #3: You Can Use Real Estate in a Retirement Account to Help Your Immediate Family

Reality: You can’t. In fact, it’s explicitly not permitted. If you’re using investments within a retirement account, it’s expected that you keep those assets separate from your personal investments. Using real estate within a retirement account to help someone in your immediate family, such as renting it out to a spouse or a child, means that you’re receiving personal benefit on the investments that are supposed to stay separate from your personal use. By receiving personal benefits, you are then potentially taking “early withdrawals” on the retirement account, negating their tax-exempt status. To avoid taxes and penalties, the best thing to do is to make sure you adhere to basic rules of thumb and avoiding interacting your Self-Directed Real Estate IRA with your immediate family. You can rent out real estate within a retirement account to renters, but they would not be able to be disqualified persons such as a family member.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at