A self-directed IRA is like all other IRAs except the owner of the IRA is in control of the investment. This unique feature allows for alternative investments which differ from traditional investments such as mutual finds, certificates of deposit and money market funds. It provides the owner of the IRA to invest in real estate if he or she desires.

All self-directed IRAs must have a custodian such as a bank or brokerage house.

Certain transactions are “prohibited” and may jeopardize your tax deferred status of the IRA resulting in disqualification along with tax consequences. Transactions with disqualified individuals are prohibited transactions. Disqualified people are spouses, parents, children etc. For example you cannot lease real estate to your parents or spouse within a self-directed IRA.

Finally, the self – directed real estate IRA may have to pay tax on the unrelated business income. This is the portion of income from debt financed property acquired vs non debt portion financed acquisition cost. The IRA can also take advantage of depreciation. If for example the property shows net income of $11,000 and is financed 50% by debt and 50% by equity, only $5,500 or (50%) of the net income is subject to unrelated business income tax. This net income would be taxed at 15% or $825 in total