Investing in Private Equity Real Estate Funds With Your Self-Directed IRA
If you are looking for a hands-off way to invest in commercial real estate with your Checkbook IRA or Solo 401(k), professionally managed funds may be worth evaluating. Private equity real estate funds are designed to help investors diversify into a stable asset class not correlated to the stock market that can provide solid returns and limited risk.
What Are Private Equity Real Estate Funds?
Real estate funds are investment vehicles created to accumulate capital for a specific type of commercial real estate investment. A private real estate company, often referred to as the sponsor, will establish a fund with a set of goals and parameters guiding how the money will be deployed. They then raise capital from investors to put to work according to that plan. By deploying fund capital into a diversified mix of projects the fund becomes more stable and less risky than an investment into a single project.
Common Fund Strategies
Private real estate funds normally focus on a specific project type or niche. A fund might look to acquire only class A multifamily complexes in high demand metros, focus on distribution warehousing facilities, or target a certain class of property like self-storage or medical offices in a specific city or region.
Capital may be deployed directly as equity in subject properties or in a combination of equity and debt instruments. The offering prospectus and legal agreements will tell you what the fund focus is.
By specializing, fund sponsors aim to leverage their network and expertise to deliver value for their investor clients.
Commercial real estate opportunities are often grouped into the following categories.
Core More conservative, stable properties in high-demand markets. The focus is on cash flow over time. Minimal risk also minimizes the rate of return. Core-Plus By increasing the amount of leverage used or performing a minimal amount of property re-positioning, a core type property may have the potential for higher returns. Value-Add These types of projects fall in the medium-to-high range on the risk/return scale. Property development, market timing, or significant property upgrades or repositioning are often involved. Opportunistic At the high end with respect to risk and commensurate returns, opportunistic funds may target new development, changing the property usage type, or distressed properties.
Fund Structures & Fees
Most real estate funds are established as limited partnerships using a LLC entity structure. As an investor, your IRA or 401(k) will be subscribing to the partnership as a limited partner.
The fund manager is responsible for creating and operating the fund and is compensated for doing so. Limited partners provide capital but have little if any say over fund operations.
Fund managers are typically compensated in two ways.
An asset management fee in the range of 2-3% of invested capital is common. This supports the operation of the fund, salaries for the fund’s management team, and the costs of finding opportunities for fund investments.
A sponsor “carry” or performance fee which is normally in the 20% range is paid to the manager. This represents a percentage of the profits produced by fund investments.
Funding an Investment
Some real estate funds will have a single funding round and collect investor capital once at the time of fund formation. This is rare, however.
More commonly, real estate funds are capitalized on an as-needed basis. As a limited partner investor, your IRA or 401(k) will commit to a certain amount of funding and is legally obligated to meet that commitment. The fund sponsor will then make a capital call once a suitable project has been identified. Such capital calls are usually focused on a set-period of time in the initial year or so of fund operations.
Be sure to read the fund prospectus and understand the funding obligations and timelines. You may want to keep committed but not deployed funds invested in the interim but would want to be sure to have the necessary liquidity to meet the demand of a capital call when presented.
Who Can Invest?
The majority of private real estate funds are limited to accredited investors. If you personally are accredited, your IRA or 401(k) inherits that accreditation status.
Some funds are available on crowdfunding platforms and available to non-accredited investors.
Minimum investment amounts vary and can be as low as $1,000 – $5,000. Minimums of $100K to $250K are more common with well-established fund operators.
Funds vs. Syndications vs. REITs
Private equity real estate funds, commercial real estate syndications, and REITs are all good mechanisms for gaining exposure to commercial real estate as an asset class. There are advantages and disadvantages to each type. It may make sense to hold investments in each of these vehicles within your portfolio.
A real estate fund is going to be more diversified than a syndication. When you place $50K into a syndication, that is going into a single property. If you wanted to deploy $250K into commercial real estate, you would need to do the research to find and perform diligence on 5 suitable projects. You could place the same $250K into one or two funds and have the capital spread across dozens of fund-held properties.
While REITs are real estate-based investments, they are traded on public exchanges and therefore more closely tied to the news cycle and general market volatility than the underlying assets might merit. REITs do have the advantages of lower barriers to entry and greater liquidity, however.
Advantages of Real Estate Funds
Investments into private real estate funds can be a good fixed-income option for self-directed retirement plan holders.
Low Engagement Professional fund managers select and execute the investments. Funds are some of the most passive investments you can make.Stable Income Real estate funds are designed to issue distributions of income to investors on a monthly, quarterly, or semi-annual basis.Low Risk Because fund capital is in real property assets and diversified the risk profile is relatively low for most core and core plus funds. Risk increases with more aggressive funds but is still low compared to a majority of other asset classes.Diversification By allocating fund capital into many projects, the impact of any single project underperforming is minimized.Scale Real estate funds provide access for your IRA or 401(k) to larger opportunities not available to individual investors.
Disadvantages of Real Estate Funds
No-Control While it is a benefit that funds are passive, it also means your role is passive. You have effectively no control over the operation of the fund. Performing due diligence on the fund therefore becomes the most important component of making such investments. Be sure the operation of the fund will align with your goals.Illiquidity Fund investments are illiquid, so your plan capital may be committed for several years. Be sure you understand in advance what limitations may be in place, and if there are any available exit options prior to fund termination.
Tax Considerations for IRA & 401(k) Investors
When evaluating a fund investment, you want to be sure to determine whether the nature of the income produced will generate exposure to Unrelated Business Income Tax (UBIT).
If the fund uses leverage in any fashion, then income derived from the borrowed capital will generate Unrelated Debt-Financed Income (UDFI). Depending on the deal structure and available deductions, the impact of this tax may be minimal. A Solo 401(k) is exempted from tax on UDFI when the debt instrument is used to acquire real property. Financing used for other means will generate taxable UDFI for a 401(k) plan investor.
When the income producing activity of a fund is passive in nature, such as rents from real property or interest, it will be tax-sheltered to an IRA or Solo 401(k). If the income is derived from a trade or business, such as new construction for immediate sale, rehabbing and directly reselling properties, or operating a services business such as self-storage, adult care, or hotels, it can generate Unrelated Business Taxable Income. The impact of this tax can be significant since there are not usually substantive deductions available as is the case with debt-financed real estate.
The offering memorandum should have language disclosing whether the fund may produce income subject to UBIT. Be sure to have your qualified tax counsel review any prospectus before you invest.
In Summary
Private equity real estate funds are worth considering if you want a passive, secure, hand’s off investment with predictable returns.
Commercial real estate is not correlated to public markets and provides diversification to your portfolio as a result.
Real estate funds are a very passive form of investing. Busy investors who may not have the time or network to manage direct investment opportunities often find this very appealing.
Real estate funds will generally outperform other fixed-income investments such as bonds, though there is a greater degree of risk.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
