Yes, you can invest in real estate with a Roth IRA, but not through a standard brokerage account. You need a self-directed IRA held by a custodian that handles alternative assets, enough cash inside the account to cover the purchase and every expense that follows, and strict compliance with IRS rules that bar you and your close family from using or working on the property. Any rental income and eventual sale proceeds grow tax-free inside the Roth. A single prohibited transaction can wipe out that tax status for the entire account.
Why a Standard Roth IRA Won’t Work
Firms like Fidelity or Schwab limit Roth IRA holdings to publicly traded securities. To hold a physical property, the account has to be a self-directed IRA (SDIRA) at a custodian equipped for alternative assets. The IRS requires every IRA to have a custodian or trustee, and nonbank entities can apply for IRS approval to serve in that role.1Internal Revenue Service. Approved Nonbank Trustees and Custodians
An SDIRA custodian handles record-keeping, moves money in and out of the account, and files the required IRS reports. The custodian does not give investment advice, evaluate deals, or warn you about a prohibited transaction before it happens. That’s the tradeoff behind “self-directed.” Every decision, and every consequence, is yours.
Fees vary. Some custodians charge a flat annual fee regardless of account size; others charge a percentage of assets. On top of that come setup fees and per-transaction charges each time money moves for a purchase, expense, or sale. A rental account generates a steady stream of transactions, so per-transaction pricing can add up. Compare fee structures carefully before opening the account.
Funding the Account
For 2026, total annual contributions across all your traditional and Roth IRAs are capped at $7,500, or $8,600 if you’re 50 or older.2Internal Revenue Service. Retirement Topics – IRA Contribution Limits That won’t buy a rental property in a single year. Most investors who use a Roth IRA for real estate fund the account through rollovers or transfers, such as rolling over a former employer’s 401(k) or converting a traditional IRA. Those transfers can bring in a lump sum large enough to cover a down payment or the full price.
Your ability to contribute in the first place depends on income. For 2026, single filers get a full contribution with modified adjusted gross income under $153,000 and phase out completely at $168,000. Married joint filers phase out between $242,000 and $252,000.3Internal Revenue Service. Roth IRAs Higher earners can still get money into a Roth through a backdoor conversion. Either way, building enough cash inside the account to buy property usually takes years of contributions, a sizable rollover, or both.
Prohibited Transactions and Disqualified Persons
This is where most SDIRA real estate deals fail. The IRS imposes strict rules under 26 U.S.C. § 4975 to prevent anyone from using retirement money for personal benefit before retirement.4Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions The law defines a category of “disqualified persons” who cannot transact with the IRA’s property in any way:
- You, the IRA owner
- Your spouse
- Your ancestors, meaning parents and grandparents
- Your lineal descendants, meaning children and grandchildren, and their spouses
- Any fiduciary of the IRA or entity providing services to it
- Entities 50% or more owned by any of the above
Siblings, cousins, aunts, and uncles are not disqualified persons under this definition.5Internal Revenue Service. Retirement Topics – Prohibited Transactions A brother or cousin could rent an IRA-owned property, though you’d still need fair market rent and thorough documentation.
The practical effect of these rules: you cannot live in the property, vacation there, use it as a home office, or let any disqualified person do those things. You also cannot personally do repairs, mow the lawn, or perform any maintenance. Your labor counts as providing services to the IRA, and the fact that you’re trying to save money doesn’t matter. Every bit of work must come from an unrelated third party.
What Happens If You Break the Rules
The penalty is harsher than most investors expect. Unlike employer-sponsored plans that face a 15% excise tax with a chance to correct, IRAs get no correction period. Under 26 U.S.C. § 408(e)(2), if you or a beneficiary engage in a prohibited transaction with your IRA, the account stops being an IRA as of January 1 of that year.6Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts The IRS then treats the full fair market value of every asset in the account as a distribution on that date.5Internal Revenue Service. Retirement Topics – Prohibited Transactions You’d owe income tax on the entire balance, plus a 10% early withdrawal penalty if you’re under 59½. One prohibited transaction blows up the whole account, not just the property involved.
What the IRA Can Own
The IRS gives broad latitude on property types. Single-family rentals, multi-family buildings, commercial space, warehouses, and raw land all qualify. Tax lien certificates purchased at government auctions are permitted, and so are fractional interests through real estate syndications where the IRA pools money with other investors.
The common thread is that the investment must be purely financial. No personal use, no personal benefit, no involvement from disqualified persons. A beachfront condo is a fine SDIRA asset as long as you never set foot in it as a guest.
Financing With Non-Recourse Loans
If the account doesn’t have enough cash for an outright purchase, the IRA can borrow, but only through a non-recourse loan. In a non-recourse arrangement, the lender’s only remedy in a default is the property itself. You cannot sign a personal guarantee, and doing so is itself a prohibited transaction under § 4975 because you’d be extending credit on behalf of the plan.4Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions
Non-recourse IRA loans carry stiffer terms than conventional mortgages. Lenders typically require a down payment of 40% to 55%, plus liquidity reserves in the account. Interest rates run higher because the lender has no recourse beyond the property. Fewer banks offer these loans, so the lender pool is narrow and underwriting takes longer.
The UBIT Tax on Debt-Financed Property
Borrowing inside an IRA triggers a tax most first-time investors don’t see coming. A Roth IRA is normally tax-exempt, but under 26 U.S.C. § 511 and § 514, when a tax-exempt entity uses borrowed money to generate income, the portion attributable to the debt becomes unrelated business taxable income (UBTI).7Office of the Law Revision Counsel. 26 USC 514 – Unrelated Debt-Financed Income The income is called unrelated debt-financed income (UDFI); the tax on it is called UBIT.
The math turns on a debt ratio. If the IRA buys a $500,000 property with a $200,000 non-recourse loan, 40% of the purchase was debt-financed, and roughly 40% of the net rental income counts as UDFI. The same ratio applies to gain on sale, using the average outstanding loan balance relative to the property’s adjusted basis during the 12 months before the sale.
Once the IRA’s total UBTI exceeds $1,000 in a year (after a $1,000 specific deduction under § 512(b)(12)), the trustee must file Form 990-T and pay tax at trust rates.8Office of the Law Revision Counsel. 26 USC 512 – Unrelated Business Taxable Income9Internal Revenue Service. Instructions for Form 990-T Trust brackets compress fast: for 2025, income above $12,500 was taxed at 37%. The tax comes directly out of the IRA. As you pay down the loan, the debt ratio shrinks, and once the mortgage is fully paid, UDFI drops to zero.
Buying the Property
When the account has enough cash (or a non-recourse loan commitment), you submit a direction of investment form to the custodian with the property address, price, title company, and the exact legal name the IRA will use. That name usually reads something like “Custodian Name FBO [Your Name] IRA,” where FBO means “for the benefit of.” The custodian won’t release funds until every detail matches.
The IRA must cover the full purchase price (or down payment plus loan proceeds), closing costs, and initial cash reserves for upcoming expenses. Every dollar comes from the IRA, not your personal account. At closing, the custodian signs on behalf of the IRA, the deed is recorded in the IRA’s name, and the custodian keeps the original title documents.
Budget conservatively for reserves. Property taxes, insurance, repairs, and vacancies all require IRA cash. If the account runs dry and you pay a bill from your own pocket, that’s a prohibited transaction.
Managing the Property
After closing, rental income flows into the IRA through the custodian. When bills come due, you direct the custodian to pay them from the account’s cash balance. The whole cycle stays inside the retirement account, which is what preserves the tax-free treatment.
Because you can’t personally manage the property, a professional property manager is effectively required. Management fees typically run 8% to 12% of monthly rent collected, and most managers charge a separate placement fee of 50% to 100% of one month’s rent when they find a tenant. Every repair, every landscaping job, every screening has to go through someone who isn’t you or a disqualified person. A property that would work fine as a personal investment because you could handle the roof yourself on a weekend can turn into a money pit inside an SDIRA where every task requires a paid contractor.
Annual Fair Market Value Reporting
The custodian is required to report the fair market value of IRA assets to the IRS each year on Form 5498, and real estate has to be reported specifically.10Internal Revenue Service. Form 5498 – Asset Information Reporting Codes and Common Errors You’ll need to provide a defensible valuation annually. Some custodians accept a comparative market analysis or broker price opinion; others require a full appraisal. That cost also comes out of the IRA.
Selling the Property
Selling mirrors the purchase in reverse. Any repairs or staging before listing must be handled by third parties, just like during the holding period. You can act as your own agent, but you cannot receive a commission or any personal compensation for the sale.
Net proceeds go directly back into the IRA. If the property was owned free and clear, those proceeds sit inside the Roth and keep growing tax-free with no capital gains tax. If a non-recourse loan was in place, the portion of the gain tied to debt financing may be subject to UBIT, using the average debt ratio over the 12 months before the sale.
You won’t owe personal income tax when you eventually take a qualified distribution from the Roth. Qualified status requires the account to have been open at least five years and for you to have reached 59½, become disabled, or be using up to $10,000 for certain first-time homebuyer expenses. Before those conditions are met, the earnings portion of a withdrawal can be taxable.
When It Makes Sense, and When It Doesn’t
Holding real estate inside a Roth IRA works best when the account already has a large balance (often from a conversion or rollover), the target property produces positive cash flow without hands-on involvement, and you have decades before you’ll need the money. Tax-free growth on years of rental income and eventual appreciation is genuinely powerful.
It works poorly when the IRA doesn’t have enough cash to absorb vacancies and surprise repairs, when the property needs the kind of hands-on care you’d normally give it yourself, or when financing costs and UBIT eat so deeply into returns that a taxable account would have been simpler. Custodian fees, required valuations, and arm’s-length management all create drag that doesn’t exist outside a retirement account. Run the numbers honestly, and talk to a tax professional familiar with both SDIRA rules and real estate before signing anything.