Individual retirement accounts (IRAs) were created to protect investors and enable them to engage in different types of investing that might not be considered entirely “the norm.” Not surprisingly, this includes real estate, historically one of the safest, simplest, and strongest types of investments not usually included in your options if you have a conventional retirement account. Self-directed investors often choose to use their retirement accounts to do real estate deals and hold real estate assets, but sometimes, this decision is actually not the best one for your pocketbook.

Here are three reasons why:

First, in some cases investors end up paying far more in taxes by investing through their IRA than they would if they handled the transaction using alternate methods.

If you’re using a Roth IRA, then no problem, but traditional accounts often come with high withdrawal rates thanks to the caveat on these accounts that withdrawals are taxed at income tax rates, not capital gains tax rates. Income tax rates can be much higher than capital gains, particularly when you’re a successful investor withdrawing money in retirement after deductions like kids and even mortgage interest may no longer apply.

Secondly, most investors who use their IRAs to buy real estate find it difficult or even impossible to get a loan with which to purchase property.

Even in cases where you can get leverage, it is very complicated, and there are a number of “present-day taxes” and associated legal implications that make the entire process a bit tricky. On the other hand, getting a loan to buy real estate outside of an IRA is relatively simple.

Perhaps the biggest issue for investors who automatically opt to purchase all real estate through their IRAs, however, is the loss of myriad other tax advantages associated with real estate ownership.

While most people default to thinking about mortgage-interest tax deductions, investment properties come with depreciation-related tax deductions and the 1031 exchange. In many cases these two benefits alone make it worth seriously considering doing a real estate deal outside of an IRA rather than inside if you have that option.

Investors using their IRAs face also complications when they buy real estate because they may have difficulty maintaining their properties personally, thanks to IRA regulations about how investments within the account are managed. They may also face increased scrutiny from the IRS in the event that they build a large portfolio. For this reason, a careful planner investing in real estate may opt to maximize non-IRA-related benefits on a real estate deal and work outside of a retirement account rather than working inside the account to do a deal. Of course, you should not generally opt out of a deal just because the only way to fund it is through your IRA. A tax and finance professional can help you make the decision that is right for you and your specific investment strategy.

You can read more of Carole VanSickle Ellis’ coverage of this and other topics at Self-Directed Investor News.

About the Author

Carole VanSickle Ellis is the host of Real Estate Investing Today, a daily nine-minute investing podcast, and the editor of the Bryan Ellis Investing Letter. Contact her at or visit



  • Carole VanSickle Ellis

    Carole VanSickle Ellis serves as the news editor and COO of Self-Directed Investor (SDI) Society, a membership organization dedicated to the needs of self-directed investors interested in alternative investment vehicles, including real estate. Learn more at or reach Carole directly by emailing

Related Posts


Submit a Comment