How to Use Your Roth IRA or SEP-IRA for Real Estate Investment

Most people who open typical IRAs put their money in normal investment products such as mutual funds. With a self-directed IRA, however, there's almost no limit to what you can invest in. This applies to traditional IRAs, Roth IRAs -- where your deposits are taxed but withdrawals are usually tax-free -- and SEP-IRAs. A SEP is an IRA funded by your employer as an employee benefit. If you're a sole proprietor, you can set up your own SEP.


Nothing in the law says that a regular Roth IRA or SEP-IRA can't invest in real estate, but many IRA managers prefer not to. You need to find a brokerage or bank that will let you direct how the IRA is invested. If your current Roth IRA or SEP-IRA manager doesn't do real estate, you can roll over some of the money to another account with a new broker. Fees tend to be higher for self-directed accounts than with regular IRAs.


First you have to build up enough money in your self-directed IRA to afford the investments you have in mind. Once you have the money, apply the same standards you would for a non-IRA investment. Do your research, crunch the numbers to figure out your potential returns and be wary of anyone who assures you this particular real estate deal is a sure thing. One of the drawbacks to self-directed IRAs is that investment fraud is widespread.


One of the limits the IRS sets on your self-directed IRA -- whether Roth, SEP or traditional -- is that you and your account must keep at arms' length from one another. If, say, your IRA buys a beachfront cottage and you then pay the IRA rent to stay there, that's what the IRS calls self-dealing. If you're caught doing this, the IRS will declare that everything in your IRA is now taxable income. That's going to leave you with a nasty tax bite.

Profit and Loss

One of the advantages of investing with an IRA is that you can buy and sell real estate without worrying about tax. Nothing in your account is taxable; taxes come when you withdraw money in retirement, and with a Roth you don't even pay tax then. The flip side is that you can't write off any real estate losses. To deduct Roth losses, for instance, you have to empty out the account. If the account's total value is less than you originally contributed, you can take that loss as a write-off.