The article below explains why consumers should avoid putting Real Estate inside an IRA.

Self-Directed' IRAs Give Investors More Options, But They Can Be Tricky

" … But making unusual IRA investments such as real estate can be tricky. The investment must be an "arms-length" transaction meaning the account holder or certain family members and associates can't live in a property, or be involved in an investment, that is held by an IRA."

"Other challenges include making sure the account has enough of a cash cushion to handle emergencies and cover mandatory distributions when you reach age 70-1/2. Violating these and other rules can result in the entire IRA being declared invalid by the Internal Revenue Service, subjecting the investor to taxes and penalties."

"There are ways to manage these difficulties, but only the most experienced investor should tackle unusual IRA investments such as real estate without help…"

" … Another potentially costly situation is when the investor must begin taking mandatory distributions. If there is no cash in the account to start taking withdrawals by the deadline (April 1 following the year you reach 70-1/2), the IRS slaps the account with a 50% penalty on the amount of the minimum distribution…"

" A more critical issue is making sure that the property remains strictly an investment by avoiding any self-dealing or prohibited transactions with family members or other disqualified persons (which can include business associates)."The penalty is stiff --anywhere from 15% to 155% of the account value," says Mr. Bromma - but it still happens three or four times a year at his firm…"

by Brian O'Connor
Wall Street Journal, August 14, 2002 page D2