Can You Buy Real Estate With an IRA: Rules, UDFI, and Risks

Yes, you can buy real estate with an IRA, but not through a typical brokerage account and not on typical terms. Federal law allows an IRA to hold rental houses, land, and other property, provided the account itself owns the asset, every dollar in and out flows through the IRA, and neither you nor close family members use or benefit from the property before retirement.¹ Break those boundaries and the IRS can treat the entire account as distributed, taxing the full balance in a single year.

Why You Need a Self-Directed IRA

Most brokerages limit you to stocks, bonds, and mutual funds. Real estate requires a self-directed IRA held by a custodian that handles alternative assets such as property, private placements, and precious metals.² The custodian’s role is administrative. It holds the account, processes transactions, and files IRS reports. It does not vet the investment or tell you whether the property is a good idea.

Some investors add another layer: a single-member LLC owned entirely by the IRA. This “checkbook control” setup lets you sign checks and pay bills directly from an LLC bank account instead of routing every payment through the custodian. The LLC holds the deed and the operating account. Either way, the principle is the same. The retirement account, never you personally, is the legal owner.

The Rules That Can Destroy the Account

Two federal statutes govern what you can and cannot do. IRC Section 4975 defines prohibited transactions and who counts as a “disqualified person.”³ IRC Section 408(e)(2) spells out the consequence: if you engage in a prohibited transaction, the account stops being an IRA as of the first day of that tax year, and the whole balance is treated as a distribution.⁴

Disqualified persons include you, your spouse, your parents, your children, their spouses, and entities those people control.³ Common violations to avoid:

Buying from or selling to a disqualified person. You cannot purchase a rental from your father or sell IRA land to your daughter.
Renting to a disqualified person. Your son cannot lease the property, even at full market rent.
Personal use of any kind. No overnight stays in an IRA-owned vacation home, no storing your own belongings in the garage.
Sweat equity. You cannot personally mow the lawn, paint a wall, or fix a leaky faucet. Unrelated third parties do the work, paid by the IRA.

The penalty is retroactive. A prohibited transaction in November disqualifies the IRA as of January 1 that same year. The IRS treats the fair market value of every asset in the account on that date as a taxable distribution, subject to ordinary income tax plus a 10 percent early withdrawal penalty if you are under 59½.⁴

How the Purchase Works

Every document names the IRA, not you, as the buyer. A typical vesting reads something like “ABC Trust Company, Custodian FBO [Your Name] IRA.” Earnest money, inspection fees, closing costs, and the purchase price all come from the IRA. Even a small personal contribution can create a prohibited transaction.

Before closing, you send a purchase authorization form to the custodian with the property details and the signed contract. The custodian reviews for compliance, then wires the earnest money to the closing agent. The custodian, or the LLC manager if you have checkbook control, signs the closing documents as the authorized representative of the IRA. The deed is recorded in the name of the account. Your personal name does not appear on the public record or the local tax assessment.

If the IRA Can’t Pay Cash

If the account lacks the cash to buy outright, financing is possible but only through a non-recourse loan. A non-recourse loan limits the lender to seizing the property itself if the borrower defaults; the lender cannot pursue you personally. A standard mortgage with a personal guarantee would violate Section 4975 because it exposes you to personal liability on behalf of the IRA.³

Non-recourse loans typically require down payments of 30 to 40 percent, carry higher interest rates than conventional mortgages, and come from a smaller pool of lenders. That is the price of keeping the IRA’s tax status intact.

The Tax Trap in Leveraged Property: UDFI

Using a loan brings in a tax called Unrelated Debt-Financed Income (UDFI). Income inside an IRA normally grows tax-deferred in a traditional account or tax-free in a Roth. When the IRA borrows, the IRS taxes the portion of income tied to the debt.⁵ The taxable share roughly matches the loan-to-value ratio: if the IRA finances 60 percent, about 60 percent of the net rental income and eventual capital gain is subject to UDFI.

UDFI is taxed at trust and estate income tax rates, which compress quickly and reach 37 percent above $16,000 of taxable income for 2026.⁶ Your custodian or tax professional files IRS Form 990-T and pays the tax from the IRA itself. Once the loan is fully paid off, the UDFI obligation ends.

Running the Property Day to Day

All rental income flows into the IRA or its LLC account. Every expense—property taxes, insurance, repairs, management fees—must be paid from that same account. You cannot cover a $10,000 roof job on a personal credit card and reimburse yourself later. Mixing funds in either direction is a prohibited transaction.

The insurance policy must name the IRA (or its LLC) as policyholder and loss payee. Claim payouts go to the retirement account, not to you.

Because every dollar has to come from the IRA, keep a cash cushion for vacancies, emergency repairs, and property taxes. If the account runs short, your options are narrow. The 2026 IRA contribution limit is $7,500, or $8,600 at age 50 and older, which may not cover a large bill.⁷ You can roll over funds from a 401(k) or another IRA into the self-directed account. Or you can sell the property, with proceeds staying inside the IRA. You cannot lend the account personal money or personally guarantee a line of credit for it.

Yearly Valuation and Custodian Fees

Real estate has no daily market price, so it needs an independent valuation each year. Your custodian reports the fair market value of every IRA asset as of December 31 on IRS Form 5498.⁸ That usually means a written appraisal or a broker’s price opinion. Your custodian sets the accepted methods and the deadline, generally before the February filing.

Custodian fees for holding real estate vary. Some charge a flat rate per asset, often $199 to $400 or more; others base fees on total account value. Wire, document, and compliance fees are common. These costs come out of the IRA and reduce your returns, so compare fee schedules before choosing.

Traditional or Roth

The account type determines how the income and eventual sale are taxed. A traditional self-directed IRA offers a possible upfront deduction on contributions and grows tax-deferred; distributions in retirement are taxed as ordinary income, and required minimum distributions begin at age 73.⁹ A Roth self-directed IRA is funded with after-tax dollars, and qualified distributions—including rental income and gains—come out tax-free. Roth IRAs have no lifetime required minimum distributions, which matters when the main asset is an illiquid building.

Both are equally bound by the prohibited transaction rules, UDFI on leveraged property, and the requirement that the account own everything.

Getting the Money or Property Back Out

Eventually, value has to come out, whether for retirement spending, required distributions, or estate planning.

Selling inside the IRA is the cleanest route. Proceeds stay in the account, no tax is owed at the time of sale unless UDFI applies, and you take cash distributions as needed—ordinary income from a traditional IRA, tax-free from a qualified Roth.

Taking the property as an “in-kind” distribution transfers title from the IRA into your personal name. For a traditional IRA, the appraised fair market value on the distribution date is taxable income. The custodian reports it on IRS Form 1099-R.

Required minimum distributions are the hard part. Starting at 73, traditional IRA holders must withdraw a minimum each year, and real estate is not easy to slice up.⁹ You can hold back enough rental cash to cover the RMD, take the full RMD from other IRAs with liquid assets (the IRS calculates the amount across all your IRAs but lets you pull from any combination), distribute a fractional interest in the property in kind, or sell or refinance to free cash. Missing an RMD carries a stiff penalty, reduced if you correct the shortfall promptly. Plan the liquidity well before 73 so you are not forced into a bad sale.

Risks Worth Weighing First

FINRA has flagged self-directed IRAs as carrying a higher risk of fraud, precisely because custodians do not evaluate the investments they hold.² Due diligence is entirely on you.

Illiquidity is the other structural problem. Selling property takes weeks or months, the contribution limit caps how much fresh money you can add, and you cannot lend the IRA personal funds to bridge a gap.⁷ You also lose the deductions ordinary landlords use—depreciation and mortgage interest—because the IRA wrapper replaces them.

And the prohibited transaction rules leave no margin. Paying one repair bill from a personal account, letting a family member spend a weekend at the property, or signing a personal guarantee on a loan can disqualify the whole account, triggering tax on its full value and possible early withdrawal penalties.⁴

1
Internal Revenue Service. Retirement Plans FAQs Regarding IRAs
2
FINRA.org. Investor Alert – Self-Directed IRAs and the Risk of Fraud
3
Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions
4
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
5
Office of the Law Revision Counsel. 26 USC 514 – Unrelated Debt-Financed Income
6
Internal Revenue Service. Rev. Proc. 2025-32 – 2026 Tax Rate Tables
7
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
8
Internal Revenue Service. Instructions for Forms 1099-R and 5498
9
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)