July 15, 2026

Paper In and Dirt Out

By: Jeffery S. Watson

Dear Ray,

I’m frequently asked what type of investment deals I do and don’t do with my IRA. I recently sold an asset held by my IRA-owned trust that was a one-half interest in a residential rental property. That was a more complicated one to set up at the beginning, but once everything was in place, it all flowed smoothly.

That deal and its challenges reinforced the strategy I’ve had for several years now of doing paper deals, such as notes, loans, mortgages, options, etc., inside of my IRA and owning real estate outside of my IRA. Is that a hard-and-fast rule for everyone? No. I know some sophisticated investors who have a lot of real estate inside their IRAs because they want all the growth to be inside the IRA and having it be tax-deferred or tax-free if they use their Roth correctly, and that’s fine. I like the simplicity of having just paper inside my IRA.

Whatever strategy you employ, the key thing is to understand the investments you are making with your IRA. Lending is an investment that has the least amount of hands-on activity required with the best upside return and protection without the risks of performing a service or doing something that would directly benefit your IRA by you personally being involved. That is my paraphrase of language found in sections of 26 USC 4975, which is a very important statute those of us who self-direct our investments must know.

The idea of owning RE inside of an IRA was very appealing back in the day...until we did it. It's very challenging to manage to say the least. Last year we finally converted the one we held that way to a ROTH at a huge cost but it's done now. Should have done it much earlier as you still have to wait five years after conversion to start taking out any money without tax consequences.