How a Self-Directed IRA Turns Retirement Savings Into Property
A Fort Lauderdale investor rolled a $410,000 employer 401(k) into an IRA last year. Instead of parking it in index funds, she used it to buy a three-unit rental property in Hallandale Beach outright, no mortgage, titled entirely to the IRA. The rent goes back into the account. The gain, when she sells, is tax-deferred until she takes distributions. She never touched the cash directly, and under the rules that govern the account, she never will until retirement.
That structure is legal. It is also far less forgiving than most investors expect. A standard IRA held at a national brokerage cannot hold a house, a duplex, or a warehouse; the custodian’s platform simply is not built for it. A self-directed IRA uses a different kind of custodian, one willing to hold title to real property, private notes, or an LLC interest on the account’s behalf while the account owner directs every investment decision. The tax code does not ban real estate inside an IRA. It bans a short list of specific transactions between the IRA and the people closest to it, and those rules are absolute. One violation does not cost a penalty. It can end the IRA’s tax-advantaged status entirely.
What Florida Real Estate a Self-Directed IRA Can Actually Buy
Almost any real property qualifies, as long as the IRA holds it purely as an investment and no disqualified person uses it. In Florida, that commonly means:
- Single-family and small multifamily rentals in Broward, Miami-Dade, and Palm Beach counties
- Condo units purchased for lease, subject to the association’s rental restrictions
- Raw land held for appreciation or future development
- Commercial property, including retail strip centers and small industrial buildings, leased to an unrelated tenant
- Fractional interests in a property alongside other investors, IRA or otherwise, through a tenancy-in-common structure
- Private notes secured by Florida real estate, where the IRA acts as the lender rather than the owner
What the IRA cannot buy is a vacation condo the account owner or their spouse, parents, or children will ever use personally, even for one weekend. It cannot buy a property from those same people, or sell one to them. And it cannot buy a home the account owner intends to live in eventually, no matter how many years out that plan sits. The investment has to stay an investment for someone other than the account owner’s household, for the entire life of the holding.
The Prohibited Transaction Rules That Can Wipe Out the Account
Internal Revenue Code Section 4975 defines a short, specific list of people the IRS calls disqualified persons: the account owner, their spouse, their parents and grandparents, their children and grandchildren, and any entity those people control. Siblings are not on the list, and neither are cousins, friends, or business partners who are not otherwise disqualified. The IRS guidance on prohibited transactions lays out the categories: the IRA cannot buy from or sell to a disqualified person, cannot lend to or borrow from one, cannot pay one for services, and cannot let one use IRA-owned property.
The rules that trip up Florida real estate investors most often are the quiet ones. An account owner who fixes a leaky faucet in the IRA-owned rental has provided a service to the plan, which counts as a prohibited transaction even though no money changed hands. An account owner who personally guarantees the IRA’s mortgage has extended credit for a disqualified person’s benefit. An account owner’s parent who manages the rental as an unpaid favor has provided compensable services outside the IRA, which the IRS treats the same way. None of these look like self-dealing to the people doing them. All of them are.
The penalty structure is severe by design: a single violation can disqualify the entire IRA retroactive to January 1 of that year, triggering a deemed distribution of the account’s full fair market value, ordinary income tax on that amount, and a 10 percent early withdrawal penalty if the owner is under 59½. There is no partial fix. The account either stayed compliant or it did not.
UBIT and UDFI: The Tax Bill Leverage Creates Inside an IRA
Most Florida real estate investors buy with leverage. Most self-directed IRA investors cannot do the same without a tax consequence many never see coming. An IRA is normally a tax-exempt trust, but the code treats debt-financed income differently. When an IRA borrows to buy property, the share of income and gain attributable to that debt becomes unrelated debt-financed income, a category of unrelated business income tax that applies even inside otherwise tax-advantaged accounts.
The mechanics come down to a ratio. If the IRA puts 50 percent down and finances the rest, roughly half of the rental income and half of any eventual gain gets taxed each year, while the cash-funded half keeps growing tax-deferred as intended.
UBIT applies once an IRA’s unrelated business taxable income crosses $1,000 in a year, and the account’s trustee reports it on IRS Form 990-T, filed under an EIN the IRA obtains for that purpose, not the owner’s Social Security number. The tax is assessed at compressed trust rates, which reach the top bracket at a far lower income threshold than individual income tax rates. A leveraged IRA-owned property in Fort Lauderdale that clears $60,000 a year in net rental income after the debt-financed allocation can owe UBIT that takes a real bite out of that gain, on top of whatever interest the IRA already pays its lender.
Solo 401(k): The Leverage-Friendly Alternative for the Self-Employed
Investors who are self-employed or who own a small business with no full-time non-owner employees have a workaround IRA holders do not: a Solo 401(k). Under Internal Revenue Code Section 514(c)(9), qualified retirement plans, including a properly structured Solo 401(k), are exempt from UDFI on debt used to finance real estate, provided the debt and the property meet specific requirements. An IRA gets no such exemption. For an investor who qualifies for a Solo 401(k) and plans to use a mortgage inside the account, that structural difference alone can be worth more than any single deal.
Custodian-Controlled vs. Checkbook LLC: Choosing a Structure
Two structures dominate self-directed IRA real estate in Florida. The first keeps the IRA custodian directly involved in every transaction: the custodian holds title, signs the contract, wires the earnest money, and pays every expense out of IRA funds at the account owner’s direction. It is slower, since every repair invoice and rent deposit routes through the custodian’s paperwork, but it keeps a professional fiduciary reviewing every dollar.
The second structure has the IRA fund a single-member LLC, then gives the account owner signing authority over the LLC’s own bank account as its manager, commonly called checkbook control. Rent, repairs, and closing funds move directly through that account without a custodian transaction fee or turnaround delay on every check. It is faster and cheaper to operate, but it puts the full weight of prohibited transaction compliance on the account owner’s own judgment, with no custodian reviewing each transaction before it happens. A single misstep, paying a disqualified contractor, or commingling personal and LLC funds, becomes the owner’s mistake alone to catch.
Neither structure suits every investor. A first-time self-directed IRA holder buying one rental property in Broward County often does better starting with a custodian-controlled account, where the custodian’s own compliance review adds a layer of protection. An experienced investor planning to hold several properties and move quickly on off-market deals often finds the checkbook LLC worth the added responsibility.
Florida-Specific Costs and Rules an IRA-Owned Property Faces
A handful of Florida rules apply differently to a retirement-account-owned property than to one bought in an individual’s own name.
The deed transferring Florida real property into an IRA-owned LLC or into the custodian’s trust is subject to the state’s documentary stamp tax, calculated on the full consideration paid, the same as any other deed. In every Florida county except Miami-Dade, that runs $0.70 per $100 of the purchase price; Miami-Dade charges $0.60 per $100 on a single-family residence and adds a surtax on other property types. On a $600,000 rental purchase outside Miami-Dade, that is a $4,200 closing cost the IRA itself pays, not the account owner personally.
The homestead exemption is not available to an IRA-owned property, and this is not a paperwork gap that gets fixed later. Florida’s homestead exemption rules require the owner to be a natural person who makes the property their permanent residence. An IRA, a custodian’s trust, or an IRA-owned LLC is not a natural person, and the account owner cannot live there anyway without triggering a prohibited transaction. The property carries its full non-homestead assessed value and full property tax bill every year it sits inside the IRA, with none of the assessment cap that benefits an owner-occupied Florida home.
Insurance, property management fees, and HOA or condo association dues all get paid from IRA funds through the custodian or the LLC account, never from the owner’s personal checking account, even temporarily to cover a shortfall. Fronting an expense personally and reimbursing later is itself treated as a loan between a disqualified person and the IRA.
Where Self-Directed IRA Real Estate Fits in a South Florida Portfolio
Individual investors and second-home buyers make up a real, tracked share of existing-home purchases nationally, a segment the National Association of REALTORS® follows through its ongoing research and market statistics. South Florida draws a disproportionate share of that activity: Miami-Dade, Broward, and Palm Beach counties combine dense rental demand, no state income tax, and a steady flow of relocating buyers who need somewhere to live while they house-hunt.
A self-directed IRA is not a way to force a mediocre property into a good tax outcome. It works best on the same deals that would make sense outside the IRA: a cash-flowing rental in a market with real tenant demand, a commercial property with a creditworthy tenant already in place, or land in a growth corridor the investor already understands. Tax deferral compounds a good investment. It does nothing for a weak one, and the illiquidity of the structure, no quick sale to cover a personal emergency, no pulling cash out without a taxable distribution, makes a bad property harder to exit than the same property held outright.
For investors weighing a self-directed IRA against a straightforward cash or conventional-mortgage purchase, the comparison usually comes down to time horizon and control. An investor already planning to hold commercial property for a decade or more tends to get more from the structure than one who wants to renovate a property personally, refinance in three years, or sell quickly if the market moves.
Getting the Structure Right Before the Purchase Contract
The mistakes that unwind a self-directed IRA almost never happen at closing. They happen months or years later, when an account owner picks up a paintbrush, covers a shortfall with a personal credit card, or lets a family member stay in the property during a slow rental season. Setting up the custodian or checkbook LLC correctly on day one matters less than having a clear rule for every dollar that moves through the account for the entire life of the holding.
At MJI Realty Group, we work with investors across South Florida who are building portfolios inside retirement accounts alongside properties they own outright, and we coordinate with each client’s IRA custodian and CPA so the property search, offer, and closing timeline match what the structure requires. If you are weighing a self-directed IRA purchase in Miami-Dade, Broward, or Palm Beach County, we can help you evaluate whether a specific property fits the strategy before you go under contract.
Real estate decisions depend on individual circumstances, including the account owner’s tax situation, retirement timeline, and risk tolerance; this article is general information, not legal, tax, or investment advice for your specific situation. An investor considering a self-directed IRA real estate purchase should confirm the structure and every transaction with a qualified CPA or ERISA attorney before signing a contract.
