Investing in Real Estate Debt Funds With Your Self-Directed IRA
Real estate debt funds have been gaining in popularity over the last decade. Since the 2008 global financial crisis, these types of funds have found a niche in the lending landscape.
For investors with a self-directed IRA or Solo 401(k) seeking an opportunity to diversify into a stable asset with solid returns and limited risk, real estate debt funds may be an alternative asset investment worth looking into.
What Are Real Estate Debt Funds?
Real Estate Debt Funds are pooled investment vehicles designed to accumulate capital for a targeted type of real estate backed lending.
These funds tend to focus on lending niches not well served by traditional banking following the 2008 economic downturn. Most funds lend on a shorter-term basis of 1-3 years for construction financing, bridge loans, debt restructuring, or property redevelopment/rehab.
Loans in the range of $1M to $100M are common, and often fall in a range too big for smaller banks yet too small for direct institutional lenders.
Creating a pool of such loans provides diversification, minimizes risk, and generates predictable fixed-income returns.
Because fund managers tend to specialize, they can be more knowledgeable of the niche they operate in and may be willing to lend where a more conservative bank may not.
The lending process is also faster as there are fewer layers of decision making and regulatory hurdles than in the conventional banking world.
By providing the efficiencies of fast access to capital in specialty situations, debt funds can command a higher interest rate on the money lent.
Fund Structures
Most funds are setup as LLC entities where investors own a limited partner interest. Limited partners are protected against liability but have minimal control over the operations of the fund.
The fund manager is responsible for creating and operating the fund and is compensated for doing so. It is not uncommon to see startup fees for organizational and fundraising work.
Most funds have an asset management fee paid to the manager that covers their operational costs during the life of the fund. The range of 1-3% of invested capital is common.
Loan servicing may be outsourced or provided in-house. Either way, this is a cost that will impact investment returns.
The profits of the fund are generally issued in the form of a preferred return to investors, with excess profits being split between the investors and the manager. The benefit of this framework is that it incentivizes the manager to get capital deployed and productive quickly, which is aligned with the interest of fund investors.
Who Can Invest?
The majority of private real estate debt funds are limited to accredited investors.
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 $25-50K are more common.
Advantages of Debt Funds
There are several reasons that debt funds can be appealing to self-directed retirement plan investors.
Simplicity – This is a very hands-off and arm’s length type of investing, well suited to IRS rules.
Consistent Income – Real estate debt funds are designed to produce regular distributions of income to investors on a monthly, quarterly, or semi-annual basis.
Security – Fund-issued loans are secured by real property. Most funds will target senior, first position debt with conservative loan to value ratios. In the event a borrower defaults, the fund will takeover the property, and should have the equity to dispose of the property profitably.
Diversification – When a fund is allocated across a variety of notes, the risk of any single loan going bad is mitigated.
Real estate debt funds allow your IRA or 401(k) to participate in larger opportunities not available to individual investors and leverage the expertise of specialists familiar with managing this type of asset.
Disadvantages of Debt Funds
As is typical with any kind of fund investment, you have little control over the operations. Performing due diligence on the fund in advance is therefore crucial. You will want to review the private placement memorandum to ensure the operation of the fund aligns with your goals.
Fund investments are usually illiquid in nature, so your money may be locked up for several years before you can expect a return of the invested principal. 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
The interest income issued to fund investors is normally classified as ordinary income. When investing using a tax-sheltered retirement plan, the income is not taxable when issued, and accrues to the plan either tax-deferred or tax free if a Roth account is used. This can result in a significant tax savings.
Some funds use a combination of investor capital and borrowed capital to make loans. If this is the case, then an IRA or Solo 401(k) investor will have a tax-liability on the Unrelated Debt-Financed Income that is produced. Note that UDFI is taxable to a Solo 401(k) on debt-financed interest income. A Solo 401(k) is only exempted from UDFI on debt used for the acquisition of real property.
Only the portion of income that the plan receives which is derived from non-plan (borrowed) capital is taxable. Many funds have a small debt component that is purely used for rapid access to fund new opportunities. That structure might not create much taxable income. If the fund itself is largely leveraged, more of the income would be taxable and it may not be a particularly beneficial investment for a retirement plan. You may want to consider non-leveraged funds as a result.
Speak with your licensed tax advisor for questions related to a specific analysis of debt usage and tax implications within a fund investment you may be considering.
In Summary
Real estate debt funds can be a good asset to hold within your retirement portfolio.
A self-directed IRA or Solo 401(k) gives you the flexibility to hold such note funds or other alternative assets as a means to diversify your portfolio.
Performance of note funds is decoupled from the stock market news cycle.
Note funds are a very passive form of investing well suited to busy investors who may not have the time or network to manage direct investment opportunities.
The income produced is consistent, with regular access to distributions. Compared to other fixed-income investments such as bonds, the rates of return are generally superior, though there is a greater degree of risk.
Capturing interest income inside the tax sheltering environment of a retirement plan can be a more tax-efficient way to participate in these opportunities.
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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.
