Self-Directed IRA Real Estate Lending: The Concept, the Rules and the Traps

You have money in a retirement account. You’ve heard that some people lend to real estate investors from their IRA. And you’re wondering whether that’s something you could do.

It might be. It’s also one of the easiest places in private lending to make an expensive mistake.

I’m a real estate investor, not a CPA, tax attorney or custodian. I’m explaining the concept of self-directed IRA real estate lending so you know what questions to ask the professionals who actually advise you. Please don’t treat anything here as tax advice.

What a self-directed IRA is

Most IRAs sit at a brokerage and hold stocks, bonds and funds. A self-directed IRA is held by a custodian that allows a broader range of assets — which can include real estate and private loans secured by real estate.

The key word is custodian. You don’t hold the account yourself. A qualified custodian administers it, holds the assets, and signs documents on the account’s behalf. You direct what the account does, within the rules, and the custodian carries it out.

How lending from an IRA works, conceptually

In a private loan funded by a self-directed IRA:

• The IRA is the lender. Not you personally. The promissory note and the mortgage name the IRA, through its custodian, as the lender.
• Funds come from the IRA. The custodian sends the money to the closing attorney handling the closing.
• Payments go back to the IRA. The borrower pays the account, not you. Money flowing to you personally is a problem.
• The same protections apply. A recorded mortgage, lender’s title insurance, hazard insurance naming the lender as mortgagee, and a closing attorney. Each is covered on the loan mechanics page.
• Costs come from the IRA. Fees related to the loan are generally paid by the account, not from your pocket.

That’s the skeleton. The details — and they matter — come from your custodian and your CPA.

Prohibited transactions: the part that bites

This is the most important section on this page.

The tax rules for IRAs prohibit certain transactions between your IRA and disqualified persons. Broadly, that group includes you, your spouse, certain family members, and certain businesses or entities connected to them. It can also include people who provide services to the account.

Why it matters: if your IRA does a deal with a disqualified person, or if you personally benefit from the IRA’s assets outside the account, it can be treated as a prohibited transaction. The tax consequences can be severe.

Examples of the kinds of situations people ask their CPA about:

• Lending IRA money to yourself, your spouse, or certain relatives
• Lending to a business owned or controlled by you or a disqualified person
• Signing personally to back a loan made by your own IRA, or personally receiving payments that belong to it
• Using IRA assets in a way that benefits you today

I’m not going to tell you where every line is, because I’m not qualified to and the rules are detailed. That’s exactly why a CPA or tax attorney who works with self-directed accounts needs to be involved before you do anything.

Questions to bring to a custodian

When you talk to a self-directed IRA custodian, consider asking:

Questions to bring to a CPA or tax attorney

That last one deserves attention. If a loan goes into default, the IRA — not you — has to pursue its remedies, and the IRA has to pay the costs. In South Carolina, foreclosure goes through the courts and takes time. An IRA with limited cash can find that difficult. More on that in what can go wrong in private lending.

The same lender discipline applies

A retirement account doesn’t change the basics. You still need to vet the borrower, understand the property, and insist on proper documents. The lender’s vetting list applies just as much when an IRA is the lender.

And the same concentration point applies, maybe more so. Retirement money is often the money people can least afford to tie up or lose. Keep any single loan small relative to the whole account, and remember that money lent from an IRA may be committed for longer than planned.

If you want to see how investors think about the properties they ask lenders to fund, browse my underwriting guide and the overview of rental property investing. You’ll ask sharper questions.

Your next step

Talk to a qualified self-directed IRA custodian and a CPA or tax attorney first — before you talk to any borrower. Then read the private money lending overview for the rest of the picture.

If, after all that, you want to talk with me about how I handle loans from retirement accounts, ask for a conversation here. I’ll reach out personally, and I’ll ask whether your CPA has weighed in.