How to Use Your IRA to Buy Real Estate: Custodians, Loans, and Rules

To use your IRA to buy real estate, you open a self-directed IRA with a custodian that handles alternative assets, move money in from an existing retirement account, and have the custodian purchase and hold the property in the IRA’s name. You never take title personally, you never pay a property expense out of pocket, and you never use or work on the property yourself. Get those boundaries right and the IRA owns the property like any other investment; get them wrong and the IRS can treat your entire account as distributed to you in a single tax year.

Open a Self-Directed IRA With the Right Custodian

Every IRA needs a trustee or custodian approved by the IRS to administer the account.¹ The problem is that most banks and brokerages only allow publicly traded securities. Real estate requires a self-directed IRA custodian, a specialized trust company that supports property, private notes, precious metals, and other alternative assets.

These custodians are passive administrators. They hold the deed, process the money, and file the annual reports, but they do not evaluate your deal, give you advice, or manage the property. You choose the property, run your own due diligence, and arrange every third-party service the property needs.

Fee structures vary. Some custodians charge a flat annual fee regardless of account size, which tends to favor larger accounts. Others charge a percentage of account value, which grows as the property appreciates, and may add per-transaction fees for purchases, wire transfers, and annual valuations. When you compare custodians, ask about every line item, not just the headline fee.

Fund the Account

Annual IRA contributions cap out at $7,500 in 2026, or $8,600 if you are 50 or older, which almost never covers a property.² Most buyers fund the purchase by moving existing retirement money into the new self-directed account.

A trustee-to-trustee transfer sends funds directly from your current IRA custodian to the new one. Nothing is withheld, no deadline applies, and the IRS does not treat it as a distribution. This is the cleanest route.

If the money is sitting in a 401(k) or another employer plan you have left, a direct rollover works the same way, with the plan sending funds straight to the new custodian. If instead the check is made payable to you, 20% is withheld automatically and you have 60 days to get the full amount deposited in the new IRA or the shortfall counts as a taxable distribution.

Know Who You Can’t Deal With

The IRS treats your IRA as a separate entity from you. Neither you nor anyone closely related to you can benefit from IRA-held property beyond the account’s investment growth.³ The people barred from dealings with the property are called disqualified persons, and the list covers:

You, as the account owner
Your spouse
Your parents and grandparents
Your children, grandchildren, and their spouses
Any business entity these people control

Siblings, aunts, uncles, and cousins are not disqualified persons under the statute. Even so, any transaction with them should stand up on market terms.

Know What You Can’t Do

A prohibited transaction is any deal that lets a disqualified person benefit directly or indirectly from IRA property. Some of the most common:

Staying in or vacationing at the property, even for a night
Buying the property from, or selling it to, a disqualified person
Hiring your child’s company to manage the rental
Pledging the property as collateral for a personal loan

Physical work on the property is its own trap. If you personally repair, renovate, or maintain the property, the IRS can treat that labor as furnishing services to the plan, which is prohibited. Sometimes called sweat equity, it is one of the most common ways owners disqualify their own accounts. All maintenance, renovation, and management must be handled by unrelated third parties, paid directly from the IRA.

What Happens If You Break the Rules

The consequences stack. Your IRA loses its tax-exempt status as of January 1 of the year the violation occurred, and the full fair market value of everything in the account is treated as distributed to you on that date.¹ You owe ordinary income tax on the entire amount. If you are under 59½, add a 10% early withdrawal penalty.⁴

Separately, excise taxes may apply to the transaction itself. The initial excise tax is 15% of the amount involved for each year or partial year in the taxable period. If the transaction is not corrected before the IRS assesses the tax or mails a notice of deficiency, an additional 100% excise tax on the amount involved can follow.³

If You Need a Mortgage, Use a Non-Recourse Loan

When the IRA does not have enough cash to buy outright, you can finance part of the purchase, but the loan must be non-recourse. That means the lender can only look to the property itself in a default. They cannot come after you personally, and they cannot reach other assets in your IRA.

A personal guarantee is off the table because it would count as an extension of credit between you (a disqualified person) and the plan, which is explicitly prohibited.³ Because the IRA alone carries the risk, lenders charge higher interest rates and demand larger down payments, typically 35% to 40% of the purchase price versus 20% or less on a conventional investment loan. Only a handful of lenders nationwide specialize in these loans, so start shopping early. The debt will not appear on your personal credit report or affect your personal debt-to-income ratio.

The Tax on Debt-Financed Income

Borrowing has a tax cost inside the IRA. When your account uses borrowed money to buy property, a portion of the income the property generates becomes taxable even inside the account. This is Unrelated Debt-Financed Income, a subset of Unrelated Business Taxable Income.⁵

The taxable share tracks the ratio of average outstanding debt to the property’s average adjusted basis during the year. As you pay the mortgage down, the taxable share shrinks. Once the debt is gone, so is the UDFI. The IRA gets a $1,000 specific deduction against UBTI each year.⁶ Above that, the IRA must file Form 990-T and pay the tax from IRA funds.⁷ Trusts hit the top 37% federal bracket on taxable income above just $16,000 in 2026, so on a leveraged property the effective rate can be steep.⁸

Execute the Purchase

Once the account is funded and you have a property under consideration, the closing sequence is designed to keep the IRA, not you, as the legal buyer at every step.

Title the purchase contract to the custodian, not you personally. A typical vesting is “[Custodian Name] FBO [Your Name] IRA.” Public records must reflect IRA ownership.
Submit a Direction of Investment form to your custodian identifying the property, the purchase price, and where the funds should go. Attach the contract, inspection reports, and title company contact information.
The custodian signs the closing documents as the authorized representative of the IRA. You can review them, but the final signature is theirs.
The custodian wires funds directly to the title company or escrow agent. Never pay earnest money, closing costs, or any other expense from a personal account.
The deed is recorded in the custodian’s name for the benefit of your IRA, and the original goes back to the custodian.

Build extra time into your timeline. Custodians commonly need five to 15 business days to process a Direction of Investment, review documents, and wire funds. Tell the seller upfront.

Run the Property Through the IRA

After closing, every dollar in and out of the property has to flow through the IRA. Rent goes into the IRA account, not your personal bank account. Property taxes, insurance, repairs, HOA fees, and management fees are paid by the custodian from IRA funds. If the IRA runs short on cash, you cannot cover the gap out of pocket. Your options are a new contribution within the annual limit, selling another IRA asset, or having the property manager advance the cost and take it out of the next rent check.

You also cannot manage the property yourself. Hire a third-party property manager for tenant relations, leases, maintenance coordination, and rent collection. Doing any of that yourself, including small repairs, risks a prohibited transaction. When the IRA eventually sells the property, the proceeds return to the IRA. In a traditional account, tax is deferred until you take distributions. In a Roth, qualified distributions come out tax-free.

Annual Valuations and Required Minimum Distributions

Your custodian has to report the fair market value of everything in the IRA to the IRS each year on Form 5498.¹ For a rental property, you supply the valuation, usually by early March for the prior year. Depending on the custodian, a comparative market analysis, a broker’s price opinion, or a formal appraisal will satisfy the requirement.

Once you reach age 73, you must start taking Required Minimum Distributions from a traditional IRA.⁹ You cannot slice off part of a building to distribute, so a real-estate-heavy IRA creates a liquidity problem. Options include holding enough cash in the IRA from rental income to cover each year’s RMD, distributing the property (or a fractional interest) in kind and paying income tax on the transferred value, or selling the property in time to distribute cash. A sale can take months, so plan ahead of the deadline.

Roth IRAs do not require distributions during the owner’s lifetime, which sidesteps this problem entirely.

Checkbook Control Through an IRA-Owned LLC

Some investors streamline day-to-day operations by having the IRA form and wholly own a single-member LLC. The IRA is the sole member, and you serve as the LLC’s manager. Because the LLC has its own bank account, you can write checks for property expenses without sending a Direction of Investment to the custodian for every transaction. This is called checkbook control.

Tax court decisions have upheld IRA-owned LLCs, confirming that an IRA can form and fund an entity without triggering a prohibited transaction and that a newly created LLC is not itself a disqualified person. The IRS has not issued formal regulations blessing the structure, so precision matters. The operating agreement has to include the language your custodian requires, the manager cannot draw compensation, and every prohibited transaction rule still applies. The LLC is a conduit, not a workaround. Not every custodian permits IRA-owned LLCs, and those that do often require an attorney or CPA to set the entity up.

Roth or Traditional

Both types of IRA can hold real estate. A traditional self-directed IRA gives you a potential upfront deduction and tax-deferred growth, with distributions taxed as ordinary income and RMDs starting at 73. A Roth self-directed IRA takes after-tax contributions and delivers tax-free qualified distributions, generally after age 59½ and five years from your first Roth contribution, with no lifetime RMDs.

For appreciating property, the Roth structure has a distinct edge: a large gain on sale inside the account is never taxed on distribution. In a traditional account, that same gain eventually comes out as ordinary income, which can run higher than the long-term capital gains rate you would have paid outside an IRA.

One caveat applies either way. If the property is financed with a non-recourse loan, UDFI applies whether the account is traditional or Roth.⁷ A Roth that generates more than $1,000 in gross UBTI has to file Form 990-T and pay tax from account funds, just like a traditional. The Roth’s tax-free treatment covers distributions to you, not UBTI generated inside the account.

1
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
2
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
3
Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions
4
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
5
Office of the Law Revision Counsel. 26 USC 514 – Unrelated Debt-Financed Income
6
Office of the Law Revision Counsel. 26 USC 512 – Unrelated Business Taxable Income
7
Internal Revenue Service. Instructions for Form 990-T
8
Office of the Law Revision Counsel. 26 USC 511 – Imposition of Tax on Unrelated Business Income
9
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs