Using a Self-Directed IRA to Buy Raw Land: Rules and Risks

A chunk of land is a powerful thing. Is there anything so confidence-instilling for a retirement portfolio than owning a piece of land? The problem is that for many investors, they don’t know that it is possible to hold this land within an IRA. By using a Self-Directed IRA to buy raw land, you can protect the capital gains from a sale of that land from the usual taxes that would happen if you were making a personal investment. But what are some rules and risks if you’re going to take this route to retirement? Here are a few things you’ll want to know.

How Raw Land Works in a Self-Directed IRA

Land, as an investment, feels timeless. It doesn’t exactly “wear out.” It won’t disappear in a storm of market volatility the way some stocks can feel. And when you hold it inside a Self-Directed IRA, those natural advantages pair with the long-term tax benefits of the account. Investors often like the simplicity of raw land because there are fewer moving parts compared to other real estate assets. There are no tenants to manage, no renovations to plan, and no property repairs waiting around the corner.

Still, the process begins the same way as any Self-Directed IRA investments. You open and fund the account, identify a parcel of land that fits your goals, and then submit the paperwork through your IRA administrator. The IRA becomes the buyer, and the land is titled in its name. From that point on, everything related to the land has to stay tied to the IRA. That separation is essential. It keeps your personal finances and your retirement account from crossing in a way that creates compliance issues.

Rules That Keep the Investment Compliant

Every expense tied to the land has to come from the IRA. Property taxes, maintenance, surveys, insurance policies, closing costs, etc. all have to be paid directly from the account. Using personal funds, even with the intention of reimbursing later, creates a prohibited transaction. That’s the kind of mistake investors want to avoid because it can jeopardize the entire account.

You also can’t personally benefit from the land while it is in the IRA. That means you can’t use it as a storage site, a weekend getaway, or a place to park equipment you own. You also can’t let certain family members use it. The IRS looks at benefit, not intention, so keeping a clean line between personal use and IRA ownership is key.

Financing is another area where the rules matter. If your IRA buys land using a loan, it has to be a non-recourse loan. That means the lender can only claim the property itself if something goes wrong. They can’t come after your personal assets. These loans have stricter terms, and they might affect the potential tax treatment of gains, so it’s something you’ll want to understand first.

Weighing the Risks and the Bigger Picture

Raw land can be rewarding, but it’s not without trade-offs. Land doesn’t produce income on its own, so you won’t see rent checks flowing into your IRA month after month. That means you’ll need enough cash in the account to cover ongoing costs. Many investors underestimate this part. A parcel of land may seem low maintenance, but taxes and upkeep still show up on schedule.

There’s also the question of liquidity. Selling land can take time. If you plan to use the funds for an upcoming distribution or want flexibility in your portfolio, it’s not as easy to sell land as it is to sell stocks and funds in the market.

Interested in learning more about Self-Directed IRAs?  Contact us at 866-7500-IRA (472) for a free consultation or download our free guide.