Self-Directed IRA Prohibited Transactions: How to Manage Property the Right Way
Owning real estate inside a self-directed IRA (SDIRA) can be a powerful wealth-building strategy as long as you manage it the right way. One area that trips up some investors is property management. There are particular SDIRA real estate rules, and if you unknowingly break them, you could face steep penalties, taxes, and even disqualification of your IRA.
I’ve worked with many clients who’ve successfully used SDIRAs to hold real estate. I’ve also seen a few who got themselves in trouble. It wasn’t because they were careless, but because the IRS rules can be complex.
This guide will help you understand the key considerations for property management within an SDIRA, enabling you to stay compliant, protect your investment, and keep your retirement funds working for you.
SDIRA Real Estate Rules: The Basics You Must Know
Let’s start with an important mindset shift: When you hold a property inside your SDIRA, you do not personally own it. Your IRA owns it. This distinction matters a lot.
You can’t directly manage the property yourself. You can’t mow the lawn, collect the rent, or hire a plumber out of your personal checking account. These actions would violate SDIRA real estate IRS rules around prohibited transactions and self-dealing.
The IRS defines SDIRA prohibited transactions as situations where you, or certain disqualified persons (family members, spouse, etc.), improperly use the IRA’s property or funds for personal benefit. Violating this can result in the entire IRA losing its tax-deferred or tax-free status.
Property management is one area where accidental self-dealing is very common. But with good structure and documentation, you can avoid these pitfalls. Let’s walk through the key steps.
Selecting a Compliant Property Manager
One of the first questions I get from clients is: “Can I manage the property myself?” Technically, you can—but it’s risky. If you handle repairs, collect rent, or negotiate leases directly, you risk violating the “self-dealing” rules, which prohibit you from providing services to the IRA property. I always recommend hiring a third-party property manager who is not a disqualified person.
Your property manager should:
Have no personal or financial relationship with you
Be hired by your IRA, not by you personally
Be paid through your IRA account, not from your personal funds
I always advise clients to choose a professional manager with strong references and experience handling investment properties. Not all managers are familiar with SDIRA rules, so part of your vetting should include confirming that they understand how to structure fees and operations in a compliant way.
Your SDIRA custodian can also be a valuable resource. At Chicago Trust Administration Services, we frequently offer guidance on what to look for in a property manager and red flags to watch out for.
Setting Up Proper Payment Channels and Documentation
One of the most common mistakes I see is investors using personal funds to cover property expenses or collect rental income. This is a clear violation of IRS rules. All income and expenses must flow through your SDIRA, not through your personal bank account.
Here’s the proper structure:
Your IRA purchases the property (via your SDIRA custodian).
Your IRA contracts with the property manager.
Rental income is collected by the property manager and deposited directly into your IRA account.
Property expenses are paid from the IRA account or via the property manager using funds from the IRA.
All contracts and payments should clearly list the IRA (not you personally) as the property owner.
Maintain clear, accurate records of all transactions. The IRS wants to see a clean separation between you and the property. If you blur the lines, you risk compliance issues.
Maintenance Fund Strategies That Maintain Compliance
Another area where things can go wrong is in handling repairs and unexpected maintenance. Let’s say a major appliance breaks and needs replacement—where does that money come from? If you use personal funds, you’re violating SDIRA rules. That’s why I always recommend building a maintenance reserve inside the IRA.
Here’s a simple approach I use with clients:
When you acquire the property, allocate a portion of IRA funds as a maintenance reserve (often 3–6 months of property expenses or a fixed percentage of property value).
Keep this reserve in cash or very liquid assets inside the IRA.
When a repair is needed, your property manager can request funds from your IRA custodian to pay for it.
By planning ahead, you avoid the temptation to “just cover it yourself” and can stay fully compliant.
Handling Tenant Issues While Staying Arms-Length
Another tricky area is tenant interactions. It can be tempting to personally meet with tenants, negotiate lease terms, or respond to tenant concerns. Unfortunately, this puts you at risk of self-dealing.
Here’s what the IRS expects:
The property manager, not you, handles all tenant communications.
Lease agreements should be between the property manager (acting on behalf of the IRA) and the tenant.
Rent collection, deposits, and notices should come from the property manager, not from you.
If a tenant contacts you directly, refer them to your property manager right away. Keeping that separation helps safeguard your IRA and keeps you clear of compliance issues.
SDIRA Prohibited Transactions and How to Avoid Them
Many SDIRA investors encounter difficulties because they aren't fully aware of the boundaries. Here are some common prohibited transactions and ways to avoid them:
1. Doing Your Own Repairs
Why it’s a problem: Providing services to the property (even unpaid) is a prohibited transaction.
What to do instead: Hire independent contractors through your property manager.
2. Using Personal Funds for Expenses
Why it’s a problem: Mixing personal and IRA funds triggers compliance issues. Even if you accidentally pay for the expenses yourself, intending to reimburse yourself, this is a prohibited transaction.
What to do instead: Fund a maintenance reserve inside the IRA and ensure all payments flow through the IRA.
3. Paying Yourself or Disqualified Persons
Why it’s a problem: You and disqualified persons can’t receive compensation or benefits from the property.
What to do instead: Use an independent property manager and contractors.
4. Collecting Rent Personally
Why it’s a problem: This creates a direct financial benefit to you.
What to do instead: Have your property manager collect and deposit rent into the IRA account.
5. Leasing to Disqualified Persons
Why it’s a problem: Renting to family members or other disqualified persons (including yourself) violates IRS rules.
What to do instead: Screen tenants carefully and only rent to unrelated third parties.
Your SDIRA Real Estate Success Partner
Investing in real estate through an SDIRA can be a powerful strategy, but it requires discipline and a clear understanding of the rules. The IRS won’t accept “I didn’t know” as an excuse.
At Chicago Trust Administration Services, we help experienced investors structure and manage their SDIRA real estate holdings in a way that maximizes opportunity while staying fully compliant. Our consultative approach goes far beyond simple administration. We’re here to help you invest strategically while keeping your IRA protected.
To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.