Real Estate in Self-Directed IRAs: Hidden Risks in Divorce Settlement

Self-directed IRAs are not something that comes up in every divorce, but when they do, they tend to catch people off guard. The account may appear straightforward on paper as a retirement asset with a stated value, but what is ‘inside’ can change everything about how it needs to be handled. When the asset is real estate, the complexity multiplies quickly.

These accounts show up most often among entrepreneurial couples or higher-net-worth households where one spouse has moved beyond traditional retirement investments and into alternative assets. If you are going through a divorce and a self-directed IRA is part of the marital estate, understanding what it actually is matters before any settlement decisions are made. In this post, we’ll review what you need to know about these accounts.

What Is a Self-Directed IRA?

A self-directed IRA, or SDIRA, functions like a traditional IRA in terms of its tax structure, but it gives the account holder control over a much broader range of investments. Rather than being limited to stocks, bonds, and mutual funds, a self-directed IRA can hold real estate, private placements, promissory notes, limited partnerships, and other alternative assets.

That flexibility is the appeal. But it also comes with a strict set of rules that govern how those assets can be held, managed, and eventually distributed, and those rules do not pause for a divorce.

How Real Estate Works Inside an SDIRA

This is where the confusion often starts. When real estate is held inside a self-directed IRA, the IRA owns the property, not the individual. This has consequences that shape everything from how the property is managed day-to-day to how it can be divided in a settlement.

Because the IRA is the legal owner, all expenses related to the property, including maintenance, taxes, repairs, and insurance, must be paid from IRA funds. Income generated by the property, such as rental income, goes back into the IRA. It cannot be paid directly to the account holder as personal income. For divorce purposes, this matters when considering what income is available for support calculations. Income flowing into the IRA is not the same as income in hand, and whether it can be considered for support purposes is a question an experienced divorce attorney will need to help answer.

There is also a personal use prohibition. The account holder cannot live in the property, vacation in it, or use it in any personal capacity. The IRA holds it as a pure investment asset, and that line cannot be crossed without triggering serious tax consequences.

Divorce-Specific Issues

The first challenge in divorce is figuring out what the asset is actually worth, and with real estate inside an SDIRA, that is not as simple as pulling a property appraisal.

An appraisal reflects market value, but it does not necessarily reflect what could realistically be received in a sale. Factors like limited liquidity, the restricted nature of the asset, and discounts for lack of marketability or control can all affect true value. A property that appraises at $400,000 may not net anywhere near that after the layers of restriction and costs associated with selling it out of a retirement account are considered.

It is also worth watching for double-counting. In a divorce, retirement accounts and real estate are sometimes inventoried separately. If the real estate inside the SDIRA is captured as both a retirement asset and a real estate asset, the value is being counted twice, which can distort the picture of what is actually in the marital estate.

Self-directed IRAs also carry strict rules around what are called prohibited transactions. The account holder cannot personally use the property, and unless real estate is their primary profession, they generally cannot perform repairs or management work on it themselves. Violating these rules can cause the IRA to lose its tax-advantaged status entirely, and divorce is not an exception.

Unlike a brokerage account or a cash balance, you cannot simply split real estate inside an SDIRA in half. There is no easy mechanism to divide the asset between two parties, which means most resolutions come down to one spouse retaining the account, selling the property and dividing the proceeds, or offsetting the receiving spouse with other assets of comparable value.

There is also a longer-term consideration. Once the IRA account holder reaches the required minimum distribution age, which is currently 73 for those who turn 73 before 2033, and 75 for those who reach that milestone afterward, distributions must begin. If the IRA's primary asset is illiquid real estate, meeting those distribution requirements may eventually require selling the property, whether the timing is favorable or not.

A Real-Life Example

Consider a couple where one spouse holds a self-directed IRA with a piece of commercial real estate inside it. The property has an appraised value of $450,000, and there is no mortgage. The IRA owns it free and clear. On paper, it looks like a $450,000 retirement asset to be divided.

But a closer look reveals several complications. The property has been difficult to lease and sits partially vacant. A realistic sale in the current market would likely yield closer to $380,000 after costs, and the timeline to sell could stretch well beyond the divorce itself. The other spouse has been offered the property as part of their share of the marital estate in exchange for relinquishing claims on other accounts.

Before accepting, they would need to understand that they cannot use the property personally, that all expenses must continue to be paid from IRA funds, that the IRA custodian must approve the transfer structure, and that eventual required distributions may force a sale. What looked like a clean asset to receive turned out to carry a set of restrictions and risks.

Working Through This with the Right Support

If a self-directed IRA holding real estate is part of your divorce, several things need careful attention before any agreement is reached. Questions to ask include:

• Has the asset been reviewed by someone who understands both SDIRA compliance rules and divorce financial planning?
• Has the property been valued with liquidity and marketability factors in mind, not just a standard appraisal?
• Has anyone confirmed there is no double counting of the asset in the marital estate inventory?
• Is a direct offset with other assets a cleaner path than attempting to transfer or divide the SDIRA itself?
• Has the account custodian been consulted about how a transfer incident to divorce would need to be structured?
• Are the required minimum distribution timelines relevant given the account holder's age, and what might that mean for the property long-term?

Self-directed IRAs holding real estate are among the more complex assets that can appear in a divorce settlement. The stated value is rarely the whole story; the rules governing the asset are strict and do not bend for a divorce, and the path to dividing or transferring it requires coordination between the IRA custodian, a tax advisor, and a financial professional who understands how these accounts work in a divorce context.

If this type of asset is part of your situation, getting the right people involved early, before a settlement is structured, is the most important step you can take. Contact me to learn more about how I can help bring clarity to the financial side of your divorce.