Holding real estate in a Self-Directed IRA can be a shot in the arm to your retirement account. Rather than storing your retirement funds in stocks and bonds, you’ll open access to an entirely different asset class—and, hopefully, an asset class you’re familiar with. You can use a Real Estate IRA to hold properties and collect rent or even potentially resell properties like raw land at a gain that you shield from taxes before retirement. But what else should you know about how a Real Estate IRA works? We’ve got a few items for you to double-check as you get started.

Double-Check: Are You Keeping Real Estate IRA Transactions at Arm’s Length?

One of the biggest rules with a Real Estate IRA is avoiding prohibited transactions. What’s a prohibited transaction? Rule of thumb: You can’t personally benefit from the property before retirement. That can mean living in it, vacationing there, or renting it out to family members.

The IRS requires that all transactions be at arm’s length, so to speak. That means any repairs, maintenance, or improvements have to be paid for using funds from the Self-Directed IRA itself, not your personal accounts.

The basic idea is that this is not your personal investment that you can use for personal benefit right now—but a separate asset you have to keep for retirement investing purposes alone.

Property management can get tricky if you’re used to handling everything yourself. If you’re actively managing tenants, collecting rent, or making direct payments for property expenses, you could run into compliance issues. That’s why many investors opt for a property manager who can handle these tasks without violating IRS rules.

Double-Check: Are You Making Sure Your IRA Has Enough Cash Reserves?

Buying real estate in a tax-advantaged account is nice, sure. But it doesn’t mean you’re free from ongoing costs. You’ll still have to cover property taxes, insurance, maintenance, and any unexpected expenses. Since all costs have to be paid directly from your Self-Directed IRA, it’s crucial to keep enough cash reserves in the account to cover these expenses.

If your IRA runs out of funds and you try to cover costs from your personal account, you could trigger a prohibited transaction, putting your tax advantages at risk. Planning ahead and keeping a financial cushion in the account can prevent headaches down the road.

Double-check: Do You Understand the Tax Implications of a Real Estate IRA?

One of the biggest advantages of using a Self-Directed IRA for real estate is the ability to defer taxes on rental income and capital gains. But there’s a catch. If your IRA takes on debt to purchase a property, the income generated from that property may be subject to Unrelated Business Income Tax (UBIT). That’s because tax-exempt accounts like Self-Directed IRAs aren’t usually allowed to use leverage, so the IRS imposes taxes on any earnings tied to borrowed funds.

This doesn’t mean leveraging a property in your IRA is a bad idea. It just means you’ll want to be aware of the potential tax impact and plan accordingly. Speaking with a financial professional who understands UBIT can help you determine the best strategy for your investments. And remember that these are typically non-recourse loans, which do offer you some additional protection.

Want to know more about Real Estate IRAs and how they work? If you’re familiar with real estate, there are few better ways to invest for the long term. But it helps to have a great Self-Directed IRA administration firm to work with. To begin your journey—and to let us double-check the paperwork, too—give us a ring at 866-7500-IRA.

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 www.AmericanIRA.com.