Can You Buy Real Estate With a Roth IRA? Custodians, Rules, and UDFI

Buying real estate with a Roth IRA is legal, but it only works through a self-directed Roth IRA held by an IRS-approved custodian that takes title to the property on the account’s behalf. Rental income and eventual sale proceeds grow inside the Roth structure, and if you follow the rules, they come out tax-free in retirement. The rules are unforgiving: you cannot live in the property, your close family cannot use it, and every dollar of income and expense must move through the IRA. A single misstep can wipe out the account’s tax status.

Getting Enough Money Into the Account

For 2026, single filers with modified adjusted gross income above $168,000 cannot contribute directly to a Roth IRA at all, with the phase-out starting at $153,000. Married couples filing jointly phase out between $242,000 and $252,000. Annual contribution limits are $7,500 for 2026, or $8,600 if you’re 50 or older.¹

Nobody is buying a rental house on $7,500 a year. The realistic way to fund a self-directed Roth IRA for real estate is a rollover or transfer from an existing retirement account: a traditional IRA, a 401(k) from a former employer, or another Roth IRA. A direct rollover between custodians has no dollar cap and avoids withholding. Indirect 60-day rollovers, where the funds pass through your hands first, are capped at one per twelve-month period, and missing the window turns the entire amount into a taxable distribution.

The Self-Directed Custodian

An ordinary brokerage Roth IRA holds stocks, bonds, and funds. To hold a deed, you need a self-directed IRA opened with a custodian or trustee approved under 26 U.S.C. § 408(a), which requires the trustee to be a bank or another entity that has shown the IRS it can properly administer the account.² The custodian holds title for the IRA, processes paperwork, and files the annual reports that keep the account’s tax status intact.

The custodian does not vet your investment. If you send them paperwork to buy a bad property, they’ll execute it. Inspections, appraisals, and market analysis are entirely on you.

What Custodians Charge

Fee structures vary. Some custodians charge a flat annual fee regardless of account size, generally $275 to $500. Others scale to assets held, running from around $150 per quarter on smaller accounts up to $2,500 or more annually for larger portfolios. Setup fees and per-transaction fees are common on top of that. All of it comes out of IRA funds.

The Annual Appraisal

Every December 31 valuation gets reported to the IRS on Form 5498, and the custodian typically needs your number by March 1 of the following year. For real estate that usually means paying a professional appraiser: $600 to $800 for a typical residential property, more for multi-unit or commercial. This is a recurring cost that stock investors never encounter, and it comes from the IRA.

Prohibited Transactions and Who Counts as Family

Under 26 U.S.C. § 4975, certain transactions between the IRA and “disqualified persons” are flatly prohibited.³ The category covers:

You, as the person directing the IRA’s investments
Your spouse
Your ancestors: parents, grandparents, and so on
Your lineal descendants and their spouses: children, grandchildren, and their husbands or wives
Any entity in which disqualified persons hold 50% or more of the voting stock, capital interest, or beneficial interest³

Siblings, aunts, uncles, and cousins are not on the list. The statute limits family to spouse, direct ancestors, lineal descendants, and their spouses.³

What You Cannot Do With the Property

The IRA cannot buy the property from, sell it to, or lease it to any disqualified person. You cannot stay in it, use it as a home office, or spend a single night. You cannot pledge it as collateral for a personal loan, and you cannot borrow from the IRA.⁴

Your labor is prohibited too. If the faucet breaks, you cannot fix it. No painting, no landscaping, no swapping out a water heater. Personal effort on IRA property is treated as a service benefiting you, which is self-dealing. Hire a third party for everything and pay them from IRA funds.

What Happens When the Rule Is Broken

The consequence for an IRA owner is not a fine. Under § 408(e)(2), when the owner or a beneficiary engages in a prohibited transaction, the account stops being an IRA as of January 1 of that taxable year, and the entire balance is treated as distributed on that date.² For a Roth IRA, the earnings portion becomes taxable income, and if you’re under 59½, a 10% early distribution penalty applies to those earnings.⁵ On an appreciated property, that can mean a six-figure tax bill in a single year.

How the Purchase Runs

Every document names the IRA as the buyer, not you. The typical format on the contract, deed, and title policy reads something like “Custodian Name FBO Your Name IRA Account #12345.” FBO means “for the benefit of,” signaling that the custodian holds the property for the account. Getting this wrong on any document creates title problems that are expensive to unwind.

You start the transaction by submitting a Direction of Investment form to your custodian, identifying the property, seller, price, and which IRA funds to use. The custodian reviews the package for compliance, which usually takes a few business days and longer for complex deals. Earnest money must move directly from the IRA to the escrow agent. Fronting the deposit from your personal checking account, even briefly, is commingling and can jeopardize the account.

At closing, the custodian signs the deed and purchase documents on behalf of the IRA. You can review the paperwork, but you are not a party in your individual capacity. Funds wire from the IRA to the title or escrow company. After recording, the deed and the title insurance policy show the IRA as the owner and insured.

Running the Property

Once the IRA owns the property, the wall between your personal money and the IRA’s cash flow is absolute. Rent goes to the custodian. Property taxes, insurance, repairs, and HOA dues get paid from IRA funds. If the roof fails and the IRA doesn’t have the cash, you cannot write a personal check. That would be an in-kind contribution at best and a prohibited transaction at worst, and it would almost certainly blow past the annual contribution limit.

Most investors use a property manager to handle tenants, rent collection, and maintenance. The manager remits rent to the custodian and submits invoices for payment. Residential management fees typically run 8% to 12% of monthly rent collected. Combined with custodian fees, annual appraisals, and the fact that you cannot deduct property expenses on your personal return (because the IRA is the owner), the real net return often looks different from a simple rental yield calculation.

Keep Cash in the Account

Liquidity is where this strategy trips up experienced investors. A new HVAC system, a bad vacancy stretch, or a special assessment can drain the IRA’s cash. You can’t top it up beyond the small annual contribution limit,¹ and if the IRA can’t meet its obligations, you can end up forced to sell at the wrong time. Buying with every last dollar of IRA cash is a common mistake.

Borrowing Inside the IRA

If the IRA can’t pay cash, it can still borrow, but only with a non-recourse loan. Non-recourse means the lender’s sole remedy on default is the property itself; there is no personal guarantee and no recourse to other IRA assets. A conventional mortgage with your personal guarantee is a prohibited transaction, because the guarantee is a benefit flowing between you and the IRA.³

Non-recourse IRA loans are a niche product. Fewer lenders offer them, rates run higher than conventional mortgages, and loan-to-value ratios are typically 50% to 65%. Down payment, closing costs, and every mortgage payment come from IRA funds.

The UDFI Tax

Leverage brings a tax that surprises many investors. Under 26 U.S.C. § 514, the portion of rental income or sale gain tied to borrowed money counts as unrelated debt-financed income, which flows into unrelated business taxable income.⁶ Section 408(e)(1) explicitly subjects IRAs to the unrelated business income tax under § 511, so even a normally tax-exempt Roth IRA owes this one.²

The taxable share is based on the ratio of average acquisition indebtedness to the property’s average adjusted basis during the year. If the IRA borrowed 60% and hasn’t paid it down much, roughly 60% of the net rental income or gain is exposed. When gross UBIT across all IRA investments reaches $1,000 in a year, the custodian files Form 990-T and the IRA pays tax at trust rates out of IRA funds.⁷ As the mortgage balance falls, so does the UDFI share, and paying off the loan eliminates it.

Solo 401(k) plans are exempt from UDFI on leveraged real estate under § 514(c)(9). If you’re self-employed and planning to use debt inside a retirement account, a self-directed solo 401(k) can produce a materially better after-tax result than a Roth IRA for this specific play.

Selling and Pulling the Money Out

When the IRA sells, the proceeds go back to the IRA. The custodian signs closing documents and receives the wire. Inside the Roth, the money can be reinvested in another property, moved into securities, or held as cash, all without tax.

Getting the money into your hands tax-free requires a qualified distribution. Two conditions apply: your first contribution to any Roth IRA was made at least five tax years earlier, and you are 59½ or older.⁵ Meet both, and the entire distribution, including every dollar of appreciation on the property, comes out free of income tax and penalty.

Take money out earlier and the Roth ordering rules help. Your original contributions come out first, always tax-free and penalty-free. Only after those are exhausted do you touch earnings, which can be taxable and hit with the 10% early withdrawal penalty if you’re under 59½.⁵ One structural advantage over a traditional IRA: Roth IRAs have no required minimum distributions during the owner’s lifetime, so the property or its cash proceeds can sit in the account indefinitely.

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
2
Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts
3
Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions
4
Internal Revenue Service. Retirement Topics – Prohibited Transactions
5
Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements
6
Office of the Law Revision Counsel. 26 U.S. Code 514 – Unrelated Debt-Financed Income
7
Internal Revenue Service. Instructions for Form 990-T (2025)