How to Take RMDs from a Self-Directed IRA That Owns Real Estate or Mortgage Notes

By Joseph E. Seagle, Esq. | Aspire Legal Solutions PLLC

If you own a self-directed IRA (SDIRA) that holds real estate or private mortgage notes, you’ve likely enjoyed greater control and diversification than with a traditional IRA. But once you reach age 73, the IRS requires you to begin taking Required Minimum Distributions (RMDs). So what happens when your IRA holds only illiquid assets—like rental property, a promissory note, or a mortgage —and doesn’t have enough cash to meet your annual RMD obligation?

Who Needs to Take RMDs from a Self-Directed IRA?

Anyone who owns a traditional self-directed IRA and has reached RMD age—currently (as of 2025) 73 under the SECURE Act 2.0—is required to take a minimum distribution annually. This rule applies whether your IRA is held directly with a custodian or through a checkbook-control IRA LLC.

Note: Roth IRAs are not subject to RMDs during the original owner’s lifetime, but inherited Roth IRAs may be.

What Happens If Your IRA Doesn’t Have Cash for the RMD?

RMDs are calculated based on the total fair market value of your IRA as of December 31 of the prior year. If your IRA owns non-liquid assets like real estate or mortgage notes, you still have to distribute an amount equal to the required value—even if your IRA hasn’t received enough cash income.

Failing to take the full RMD can result in a 50% IRS penalty on the shortfall, so this is a critical compliance issue.

Why Is This a Common Problem with Real Estate IRAs?

Real estate investments often tie up capital in long-term equity. Rental income may be used for expenses like property taxes and repairs, leaving little or no cash for distributions. Likewise, mortgage notes may not generate regular payments, or may be structured with balloon payments. Your IRA may be worth hundreds of thousands on paper—but have no liquidity.

Where Can the RMD Come From?

1. In-Kind Distributions: One option is to satisfy your RMD by transferring a portion of the IRA’s assets—such as a membership interest in a checkbook-control LLC, fractional ownership in property, or a partial assignment of mortgage—to your personal name. The fair market value of the asset on the date of distribution will count toward the RMD. Your custodian must re-title the asset and report the transaction on Form 1099-R.

2. Use Other IRA Funds: If you have other IRAs with available cash, you may take your total RMD from one account to satisfy the requirement across all traditional IRAs.

3. Sell or Refinance: You can also sell or refinance real estate inside the IRA to raise the cash needed, although this may not always be timely or feasible.

When Do You Need to Act?

RMDs must be taken by December 31 each year, except for your first RMD, which may be delayed to April 1 of the following year. If your IRA holds illiquid assets, plan ahead to allow time for valuations and asset transfers.

How to Stay Compliant with RMDs in a Real Estate IRA

• Work with your IRA custodian to initiate and document in-kind transfers properly.
• Obtain a third-party appraisal or fair market valuation for real estate or LLC interests.
• If your IRA is structured as a checkbook-control LLC, ensure any distributions of LLC interest are properly re-titled and do not trigger prohibited transactions under IRC § 4975.

Final Thoughts

RMD planning with a self-directed IRA requires more strategy than with cash accounts, especially when real estate or private loans are involved. But with good recordkeeping, fair valuations, and a responsive team—including your custodian, CPA, and legal adviser—you can stay compliant and protect your retirement savings.