Why Physical Real Estate May Not Belong in Your IRA

For many investors, real estate is a cornerstone of building wealth. It provides potential appreciation, steady rental income, and diversification outside of traditional stock and bond markets. But when it comes to retirement accounts like IRAs, directly owning physical real estate often creates more headaches than benefits.

Before we dive into why, let’s acknowledge what makes real estate powerful in the first place.

The Power of Real Estate Ownership

Real estate can be a highly effective wealth-building tool for several reasons:

• Cash Flow: Rental income can provide steady, inflation-resistant income streams.

• Appreciation: Over time, real estate has the potential to grow in value, helping build equity.

• Leverage: Mortgages allow investors to control a larger asset with less upfront capital, magnifying returns when property values rise.

• Tangible Asset: Unlike stocks and bonds, real estate is a physical asset with intrinsic utility.

And perhaps most importantly—

Real Estate’s Tax Efficiencies

Owning real estate personally comes with powerful tax benefits:

• Depreciation deductions can offset rental income.

• Mortgage interest and expense deductions reduce taxable income.

• 1031 exchanges allow you to defer capital gains by rolling proceeds into another investment property.

• Step-up in basis at death can potentially eliminate capital gains for heirs.

These advantages are a big part of why real estate has historically played such a strong role in wealth creation. Unfortunately, many of them don’t apply when real estate is owned inside an IRA.

Why Real Estate in IRAs Often Falls Short

1. Strict IRS Rules and Penalties

If you personally benefit from the property—by staying in it, renting it to a family member, or even performing maintenance—you could trigger a prohibited transaction. That mistake may cause the entire IRA to become immediately taxable, along with penalties.

2. Limited Access to Cash Flow

Rental income must remain in the IRA. You cannot use it until you take distributions, and distributions may be taxable. If you hoped for current income, this structure doesn’t help.

3. Maintenance and Liquidity Issues

All expenses must be paid from IRA funds. If the account doesn’t have enough cash, you may be forced to sell the property or scramble for contributions, which are subject to annual limits.

4. Loss of Tax Benefits

The biggest drawback: none of the powerful tax benefits mentioned earlier apply. Depreciation deductions, 1031 exchanges, and other strategies are off the table. You only get the IRA’s tax treatment, which may not be as advantageous for real estate.

5. UBIT Exposure

If leverage is used, income and gains may be subject to Unrelated Business Income Tax (UBIT), creating unexpected bills inside your IRA.

6. Concentration Risk

Tying up retirement savings in one illiquid property can reduce flexibility, especially when required minimum distributions (RMDs) begin.

Conflicts of Interest with Advisors Recommending Physical Real Estate in IRAs

When an advisor recommends holding physical real estate inside an IRA, there are several possible conflicts of interest that investors should be aware of:

1. Custodian and Administrative Fees

   • Real estate held in a self-directed IRA requires a specialized custodian. These custodians often charge higher annual fees, transaction fees, and property management processing fees. An advisor recommending this path may indirectly benefit if they are affiliated with or compensated by the custodian.

2. Commission Structures

   • Unlike fee-only fiduciary advisors, some advisors or salespeople are compensated through commissions tied to the setup of self-directed IRA accounts or the purchase of specific real estate investments. This creates a conflict where the recommendation may be driven by compensation rather than client benefit.

3. Product Placement Incentives

   • Some real estate promoters package properties specifically for IRA investors. Advisors associated with these programs may earn referral fees, marketing allowances, or other incentives that influence their advice.

4. Complexity as a Barrier

   • Physical real estate in an IRA is complicated. If an advisor downplays the risks—such as prohibited transactions, UBIT exposure, or liquidity problems—they may be prioritizing a transaction over your best interest.

5. Diversification Concerns

   • Advisors recommending a large, illiquid real estate investment inside an IRA may knowingly allow a client’s portfolio to become concentrated in a single asset class. That can undermine the retirement account’s role as a diversified savings vehicle.

The Fiduciary Standard Matters

Fee-only fiduciary advisors are legally obligated to put clients’ interests first. That means disclosing potential conflicts, explaining the risks clearly, and showing how a recommendation aligns with the client’s goals.

If an advisor suggests holding physical real estate in your IRA, it’s worth asking:

• How are you compensated for this recommendation?

• Are there alternatives that achieve my goals with fewer restrictions or risks?

• What are the ongoing costs of administration, and who benefits from them?

  
  

The Bottom Line

Real estate is a proven wealth-builder, thanks to its income potential, appreciation, and tax efficiencies. But those benefits largely disappear inside an IRA, while new risks and compliance issues are introduced.

For most investors, it makes more sense to hold real estate outside of retirement accounts, where you can use the full suite of tax advantages. Inside IRAs, more traditional investments—like REITs or funds that provide real estate exposure—may offer a simpler, more liquid way to diversify your portfolio.

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About Rigden Capital Strategies

Rigden Capital Strategies was born out of a simple but powerful idea: financial advice should be personal, transparent, and built around your goals—not generic solutions or product-driven sales. Fueled by decades of experience and a desire to see clients truly succeed, we’ve created a process rooted in value, integrity, and progress.

As a fee-only fiduciary, we offer dynamic, stress-tested wealth plans tailored to your life. Our expertise spans investment management, retirement and tax planning, and estate guidance—blending active and passive strategies to help your portfolio through any market. We believe in real relationships, clear strategies, and long-term results.

Your goals, our strategies. Together, let’s make your goals happen.

Disclaimer: This post is for educational purposes only and is not intended as tax or investment advice. Investors should consult with a qualified financial planner or tax professional before making decisions about retirement accounts and real estate.