IRA Investments in Real Estate Partnerships
Many of the most stable and best performing types of real estate investment opportunities pose a problem. They are expensive. While apartments, medical office complexes, and industrial facilities can all produce consistent and above average returns, most investors do not have enough money in their self-directed IRA or Solo 401(k) to fund a deal on their own.
Utilizing partnership vehicles can be a great way to diversify some of your tax-sheltered retirement savings into larger real estate deals. By pooling your plan funds with capital belonging to other investors, you can achieve greater scale than you can on your own.
Following are some key things to keep in mind when considering real estate partnerships.
Partnership Benefits
Investing in real estate partnerships can have several advantages.
Commercial real estate has always been a stable and high-performing asset class. Most investors cannot purchase such larger deals on their own. Participating in a partnership opens the door to these types of opportunities.
Most partnerships acquire multi-tenant properties, which reduces vacancy risk. When your IRA owns 100% of a single rental unit, a vacancy means a 100% loss of income. When your plan owns a fraction of a multi-tenant property, a single vacancy will not impact income as severely.
Many real estate partnerships are led by someone with extensive experience in the type of property and market where the investment is taking place. Being able to leverage that expertise and have your IRA take a more passive role is a great way to invest.
Types of Partnerships
There are a few different types of partnership structures available, depending on the scale of the project and the amount of capital required.
Joint Ventures
Joint ventures typically involve a small number of investors and can be suitable for smaller deals.
Rather than create a formal partnership entity with its own layer of administrative and tax requirements, investors simply take title to a property jointly as tenants-in-common. Each partner is responsible for their own share of income and expenses and will manage their own filing obligations.
A formal joint venture operating agreement between the parties is recommended, but there is no need to create or maintain state business entity filings or file a partnership tax return in most cases.
Small Partnerships of Equals
Sometimes there are benefits to creating an entity such as an LLC for several investors to partner into.
The entity layer can simplify administration of the investment, as it will have its own bank account, insurance policy, etc.
Usage of an LLC can also provide a unified layer of liability protection for all involved partners.
It is possible to have a small number of partners each of whom have administrative authority. Alternately, one or a small number of partners can take an active role in the management of the project and other partners can simply provide capital.
A partnership of this type will need to file applicable tax returns at the state and federal level, and will pass income to the individual partners on a schedule K-1. Each partner is then responsible for their own income reporting based on that K-1.
Larger Partnerships
Some larger deals will utilize a partnership structure often referred to as a real estate syndication. In this case, there is a general partner that puts together the deal and operates the investment. Limited partners simply provide a share of capital and rely on the general partner to run the show.
Being a limited partner is a more passive role, and is therefore a very popular route for IRA and 401(k) investors looking to diversify into real estate without needing to be hands on.
As with a smaller partnership, the entity will issue K-1’s to limited partners, who will then be responsible for reporting their share of income as appropriate to their tax status as an individual, IRA, etc.
Who Can Your Plan Partner With?
When participating in any kind of partnership, it is important to keep IRS rules surrounding prohibited transactions and disqualified persons in mind.
Any direct or indirect transaction or provision of benefit between an IRA and a disqualified person such as you, your spouse, lineal family, or a business entity controlled by you or close family members can put your plan at risk of severe tax consequences.
The best practice is to avoid partnerships that combine IRA or 401(k) funds and a disqualified person. This strategy eliminates a key factor of compliance risk.
There are several plan providers and attorneys who speak about the ability to partner IRA money with funds belonging to disqualified persons, and it is “technically” possible to do so in a way that has perceived minimal risk.
The key argument made is that if the partnership is formed with all involved parties starting on day one, and each party retaining their own share of expenses and income over the life of the project, then there is no transaction being created between any of the parties.
The challenge is that situations can change in ways that might not keep that rigid simplicity in place. A partner could die, divorce, or otherwise want out of a project. A deal can run into a cash flow issue where not all parties are able to bring new cash in the same percentages as the original capitalization. It is difficult to entirely future-proof any real estate transaction, and that equates to compliance risk.
There are some cases where the flow of capital may be clean, but other forms of benefit are being provided between the IRA and a disqualified person, potentially including even the possibility of participating in a deal they could not without access to the other party’s funds.
At the end of the day, the IRS has the leeway to determine whether a violation has occurred based on their interpretation of the facts and circumstances. Do you really want to introduce that risk factor?
Management of Partnerships
In a small partnership, it is OK for each member to vote their own interests, and you can do that on behalf of your plan.
If you or a disqualified person are providing a layer of services to a partnership that goes beyond administering your plan’s interest in the deal, that can create problems. You cannot benefit from the plan, such as receiving compensation for services performed to the partnership.
The reverse is also true. You cannot provide benefit to the plan through the provision of goods or services. Your time and personal resources or capital have value, and if you are in effect gifting that value to your IRA or 401(k), you are basically making a non-documented contribution to the plan. The IRS can view that as a prohibited transaction.
Partners Can Fund as They Choose
Many new IRA investors believe their IRA can only partner with other IRA money. This is simply not true or necessary. What matters to the IRA is operating in accordance with IRS rules. Whether another partner in a deal is using IRA money or their own cash is of no relevance.
Adding Leverage to the Mix
In addition to pooling investor cash from multiple partners, may ventures will also employ debt-financing such as a mortgage. This is especially common in larger deals and real estate syndications.
A retirement plan can participate in a debt-financed deal. The same concerns about the use of leverage apply as if the IRA or 401(k) were investing on its own.
Any debt instrument must be non-recourse with respect to the IRA, meaning that the IRA account holder or any disqualified person to the IRA is not pledging a personal guarantee. It is possible that some partners not using IRA money might place a guarantee on debt, while an IRA partner does not, but those can be difficult loans to negotiate with a bank.
With an IRA, the portion of income attributed to borrowed capital is considered Unrelated Debt-Financed Income (UDFI) and subject to taxation.
A Solo 401(k) is not taxed on UDFI when the debt in question is used for the acquisition of real property.
A Popular Option
Real estate partnerships are an increasingly popular way for investors to deploy their self-directed IRA or Solo 401(k). When you add up the benefits of investing passively into larger deals that are professionally run, it makes sense that more and more people are considering this type of opportunity.
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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.
