A Practical Look at How Self-Directed IRAs Open the Door to Private Real Estate
Most retirement accounts are limited to a narrow menu of stocks, bonds, mutual funds, and exchange-traded funds — but that limitation is not written into the tax code. It’s a business decision made by the brokerage holding the account. A self-directed IRA (SDIRA) removes that limitation by using a different kind of custodian, one willing to hold a broader range of assets, including private real estate. It also introduces a different set of rules and a different set of responsibilities that an investor needs to understand clearly before using one — rules that are frequently misunderstood in ways that carry real consequences.
What a Self-Directed IRA Is, and How It Differs From a Typical IRA
A self-directed IRA is, at its core, the same type of account as a conventional IRA — Traditional or Roth, with the same contribution limits and the same tax-deferred or tax-free growth. What differs is the custodian. As the IRS explains in Publication 590-A, an IRA custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity specifically approved by the IRS to act as trustee or custodian. A conventional brokerage IRA custodian is built to hold publicly traded securities and, as a matter of its own business model, generally will not hold a stake in a private offering. A self-directed IRA uses a specialized, qualified third-party custodian whose business is built specifically around administering alternative assets — private real estate among them — inside a tax-advantaged retirement account, while still handling the recordkeeping and IRS reporting any
IRA requires.
It’s worth being direct about one point: this custodian is a separate, third-party institution. Longview Commercial does not act as a custodian, does not hold custody of IRA assets, and does not provide custodial services of any kind. An investor using a self-directed IRA works with a custodian of their own choosing.
One mechanical requirement follows directly from that structure: all income and expenses connected to an IRA-owned investment must flow through the IRA itself. Rent, distributions, capital calls, and property-related expenses move to and from the account — never to or from the account holder personally. That separation is not a formality; it is the foundation for several of the rules described below.
Legal Permissibility vs. Custodian Willingness
This distinction is easy to blur, and it matters.
The first question is what the tax code legally permits an IRA to hold. Here, the IRS approach is worth understanding precisely: rather than publishing a list of approved investments, the IRS instead names a short list of things an IRA cannot hold — chiefly collectibles and most life insurance contracts. Because real estate does not appear on that narrow prohibited list, it is, as a matter of law, a permissible IRA asset.
The second question is entirely different: whether a specific custodian is willing and equipped to administer a specific alternative asset. Most mainstream, brokerage-affiliated IRA custodians choose not to support direct real estate holdings — not because the tax code forbids it, but because their business isn’t built to service it. Valuing an illiquid asset, tracking a fractional real estate interest, handling capital calls and distributions tied to a specific property, and meeting the reporting obligations that go with it require infrastructure that a typical brokerage custodian simply hasn’t built. That is a business decision made by that custodian, not a legal restriction that applies to IRAs generally.
The practical implication is that confirming real estate is “allowed” under the tax code is only half the work. An investor still has to separately confirm that their chosen custodian actually administers the specific type of asset they intend to hold — and custodians vary meaningfully in what they support, how they price their services, and how they handle the operational details of an alternative-asset IRA.
“It disqualifies the entire IRA.”
What Using a Self-Directed IRA Actually Requires
In practice, using an SDIRA for real estate involves several distinct steps and ongoing responsibilities: selecting a custodian with actual experience administering the specific asset type being considered; understanding that every dollar in and out of the investment must move through the IRA, not through personal accounts; budgeting for custodian fee structures, which are typically different — and often less familiar — than a standard brokerage IRA’s fee schedule; and accepting a meaningfully higher degree of personal recordkeeping and compliance responsibility than a conventional, professionally managed brokerage IRA requires. None of this makes an SDIRA the right or wrong choice for any particular investor; it simply describes what the structure actually involves.
Prohibited Transactions and Disqualified Persons
The IRS defines a category of “disqualified persons” for IRA purposes, and transactions between an IRA and a disqualified person are generally prohibited. For an individual’s IRA, disqualified persons include the account holder, the IRA’s fiduciary, and specified family members — a spouse, ancestors, lineal descendants, and the spouses of those lineal descendants.
The IRS identifies concrete examples relevant to real estate specifically: selling, exchanging, or leasing IRA-owned property to a disqualified person; a disqualified person’s personal use — present or future — of property the IRA owns; and using IRA-owned property as security for a loan in an impermissible way. These are self-dealing restrictions, and they are broader than they might first appear — “future” personal use, for instance, can implicate a transaction made today.
The consequence is precise, and it should not be softened. Per IRS guidance, if the IRA owner or beneficiary engages in a prohibited transaction, the account “stops being an IRA as of the first day of that year,” with the entire value of the account — not merely the asset involved in the transaction — treated as a taxable distribution as of that date. This is worth restating because it is easy to misread: a prohibited transaction does not simply void or penalize the specific asset. It disqualifies the entire IRA.
Unrelated Business Taxable Income and Debt-Financed Property
This is a separate issue from prohibited transactions, governed by a different part of the tax code, and it applies even when no disqualified person is involved and no self-dealing has occurred.
IRAs are generally tax-advantaged vehicles, but that advantage is not unconditional. When an IRA acquires real estate using debt financing rather than the IRA’s own funds outright, the income and gain attributable to the debt-financed portion of the investment can become Unrelated Debt-Financed Income (UDFI) under Internal Revenue Code Section 514 — a category of Unrelated Business Taxable Income (UBTI), sometimes referred to as UBIT. Under IRC Section 514, income from property acquired with borrowed funds can become taxable to the IRA in proportion to the share of the investment financed with debt. In plain terms: if a third of a property’s acquisition cost was financed with debt rather than IRA capital, roughly a third of the resulting income and gain can be subject to this tax — generally computed and reported on Form 990-T, separate from, and in addition to, the account’s ordinary tax treatment.
This is specific to leverage inside a tax-advantaged account. The same real estate investment, held without debt financing, would not trigger UDFI in the same way. It is a tax cost that arises from the interaction between debt and a tax-exempt or tax-deferred structure — not a general feature of simply holding real estate in an IRA.
What This Means for an Investor
None of the above is a recommendation for or against using a self-directed IRA for real estate exposure — that determination depends on an individual’s overall financial picture, retirement timeline, and tax situation, and it is not something a general article can responsibly answer. What can be said generally is that the structure carries real legal permissibility for holding assets like real estate, alongside custodian-specific practical constraints, and two categories of tax and compliance risk — prohibited transactions and UDFI/UBTI — that operate separately from one another and carry meaningfully different consequences.
A Note on Longview’s Offerings
Investors considering a self-directed IRA for any private real estate investment — with Longview or otherwise — should work directly with a qualified custodian and their own tax advisor before proceeding, since custodian capabilities and individual tax circumstances vary considerably from one investor to the next
If you’d like to talk through how this structure applies to your own situation, Request a Conversation with our team.
Longview Commercial does not provide tax, financial, or legal advice. This article is for general informational purposes only. Please consult your own qualified tax, financial, or legal advisor before making any investment decision.