If you are considering a commercial real estate investment, one option you may not be aware could be within your reach is the use of your IRA to fund the purchase. While there are some rules you should keep in mind and follow closely, this could be a smart business move for investors who are in a financial position to take advantage of it.

You will need to start by setting up a self-directed IRA, which can include investments beyond stocks, mutual funds and bonds. Your new self-directed IRA will require a different custodian than your regular IRA. Look for a custodian that will simply administer your account, not one that functions as an investment advisor. Also specify that you want checkbook control over your account, so that you do not have to call upon the custodian every time you want to withdraw funds to pay expenses relating to the property.

When you have rolled over funds from your regular IRA to your new self-directed IRA, you are free to use your retirement funds to begin investing in commercial real estate. But be forewarned that there are many rules you must comply with or risk being hit with taxes, penalties and interest down the line.

The property cannot be used by you or any other disqualified persons, such as your spouse, your children, your children’s spouses, your parents, your grandparents, and your grandchildren and their spouses. Nor can the property be used by any of your businesses, or businesses owned by your businesses. Other disqualified persons include service providers of the IRA and entities owned or held by those service providers. In short, it can require much due diligence to ensure that property use is in compliance with these IRS rules.

With a self-directed IRA, any commercial real estate investment property will almost certainly need to be purchased with cash. Debt-financed property is rarely possible with a self-directed IRA, but in the event you do obtain financing, it must be a non-recourse loan. Debt-financed property will also be subject to unrelated business income tax (UBIT). Any expenses related to the property must be paid from funds in your IRA. Such expenses may include fees, taxes, maintenance and insurance. Income generated by the property must be transferred back to your self-directed IRA and can then be used for property expenses. However, if your monthly income falls, you must have sufficient cash on hand in your self-directed IRA to continue covering your expenses.

Commercial real estate investments can be made via a self-directed IRA, but stringent rules apply. Any investors considering this strategy should do careful research in advance.