You can hold real estate in an IRA, but only through a self-directed IRA with a custodian approved for alternative assets, and the rules are stricter than most investors expect. The IRA itself owns the property, not you personally. Every dollar of income and expense must run through the account, and crossing the line between personal and IRA assets can disqualify the entire IRA and trigger income tax on the full account value. The payoff for staying inside the lines is tax-deferred growth on rental income and appreciation, or tax-free growth in a Roth.
Why You Need a Self-Directed IRA
A standard brokerage IRA limits you to publicly traded investments like stocks, bonds, and mutual funds. To buy property, you need a self-directed IRA administered by a custodian approved to hold alternative assets. The custodian’s role is purely administrative. They don’t give investment advice, evaluate properties, or perform due diligence on deals. That responsibility falls entirely on you.
The custodian holds legal title to every asset on behalf of your IRA. Your deed will read something like “ABC Trust Company FBO [Your Name] IRA” rather than your personal name. That structure is what preserves the tax-advantaged status of the account. The custodian processes paperwork, holds records, issues tax forms, and moves money when you direct them to.
Some investors go a step further and set up a checkbook IRA, in which the IRA forms a single-member LLC and the property is titled in the LLC’s name. You become the LLC’s manager and can write checks directly for repairs and expenses without routing each one through the custodian. The tradeoff is that you bear full responsibility for staying inside IRA rules, with no custodian reviewing each transaction before it happens.
What Kinds of Property You Can Buy
Federal law doesn’t publish an approved list of IRA investments. Instead, it prohibits a few categories and allows nearly everything else. IRAs cannot hold life insurance or collectibles such as artwork, antiques, gems, and most coins. Real estate is not on the prohibited list.
Self-directed IRAs commonly hold:
- Residential rentals, including single-family homes, duplexes, and apartment buildings
- Commercial property such as office space, retail storefronts, warehouses, and industrial buildings
- Raw land held for appreciation or future development
- Tax liens and tax deeds purchased at government auctions
Foreign real estate is technically permissible but complicated. Some countries restrict foreign ownership or require you to form a local entity to hold title, and you’ll need to navigate the tax laws of that country alongside U.S. IRA rules. The IRA’s U.S. tax-deferred status is preserved, but the foreign country may impose its own taxes on the property.
Disqualified Persons and Prohibited Transactions
This is where most people get into trouble. The tax code defines a group of “disqualified persons” who cannot transact with your IRA in any way. That group includes you, your spouse, your parents, your children, your grandchildren, the spouses of your children and grandchildren, and any entity those people control. A family business, a trust you set up, or a partnership where you own 50% or more all fall within the restriction.
Your IRA cannot buy property from, sell property to, or lease property to any disqualified person. No disqualified person can live in, vacation at, or use the property in any way. You also cannot perform maintenance, repairs, or improvements yourself. If a pipe bursts at 2 a.m., you hire a plumber and pay them from IRA funds. Picking up a paintbrush yourself is a prohibited transaction.
The consequences are severe. If you engage in a prohibited transaction, your IRA ceases to exist as of January 1 of that tax year. The entire account balance is treated as distributed to you on that date, valued at fair market value. You owe income tax on the full amount, plus a 10% additional tax if you’re under age 59½. The penalty hits the whole account, not just the offending transaction.
Because you can’t manage the property yourself in any hands-on capacity, most IRA-held rentals require a professional property manager. Management fees for residential rentals typically run 7% to 12% of monthly collected rent.
Every Dollar Must Flow Through the IRA
One of the most common and costly mistakes is paying a property expense out of your own pocket. Property taxes, insurance premiums, HOA fees, repair bills, and utility costs must all be paid from your IRA’s cash reserves. Rental income must be deposited back into the IRA. You cannot personally collect a rent check and deposit it into the account later. Money flows from tenant to custodian, or to the LLC’s bank account under the checkbook structure.
Paying a $200 repair bill from your personal checking account might seem harmless, but the IRS views it as a contribution of value from a disqualified person to the IRA. That can be treated as a prohibited transaction with the same catastrophic consequences described above. Keep enough uninvested cash in your IRA to cover several months of expenses. Running short on liquidity inside the account creates a situation where you either violate the rules or let the property deteriorate.
Financing with a Non-Recourse Loan
Your IRA can take out a mortgage, but it cannot be a standard recourse loan. The tax code prohibits using IRA assets as collateral for a personal loan, and you cannot personally guarantee the debt. The loan must be non-recourse, meaning the lender’s only remedy in a default is taking the property itself. They cannot pursue the IRA’s other assets or your personal assets.
Non-recourse lending for IRAs is a niche market with stricter terms than conventional mortgages. Lenders typically require 40% to 55% of the purchase price as a down payment from the IRA’s cash. Interest rates run higher than you’d pay on a personal mortgage, and loan terms tend to be shorter. The down payment, origination fees, and every monthly payment must come from the IRA. If the IRA can’t make a payment, you can’t step in and cover it from personal funds.
The UBIT Trap on Leveraged Property
Using a loan inside your IRA triggers a tax that catches many investors off guard. When an IRA earns income from debt-financed property, the portion of that income attributable to the borrowed money is called unrelated debt-financed income and is subject to unrelated business income tax. The tax applies even though the IRA is otherwise tax-exempt.
The taxable percentage is calculated by dividing the average loan balance during the year by the property’s average adjusted basis. If your IRA bought a $400,000 property with $160,000 in cash and a $240,000 loan, the leverage ratio is 60%. Roughly 60% of net rental income and 60% of any capital gain at sale would be subject to tax. The rates match trust income tax rates, which reach 37% quickly.
Your IRA must file Form 990-T and pay the tax if gross unrelated business taxable income reaches $1,000 or more in a year. The IRA needs its own employer identification number for the filing. As the loan is paid down, the taxable percentage shrinks, and once the property is owned free and clear, the tax goes away.
How the Purchase Actually Works
Make sure your IRA has enough cash to cover the purchase price (or down payment if financing), closing costs, and a reserve for near-term expenses. You can fund the account through annual contributions, which are capped at $7,500 for 2026, or $8,600 if you’re 50 or older. Rollovers from other retirement accounts have no dollar limit and are usually the main way people get enough capital into a self-directed IRA for a real estate purchase.
Once you’ve identified a property, submit a Direction of Investment form to your custodian. This form tells the custodian to proceed with the purchase and includes details like the property address, purchase price, and how the deed should be titled. When you make an offer, the buyer on the contract must be listed as the custodian for the benefit of your IRA, not your personal name.
After the custodian reviews and approves the paperwork, they wire the purchase funds to the title company or escrow agent. The closing proceeds like any other real estate transaction, and the deed is recorded with local government reflecting the IRA’s ownership. Under a checkbook LLC, the deed names the LLC, and funds wire from the LLC’s bank account.
Annual Valuation and Required Distributions
Your custodian must report the fair market value of every asset in the account to the IRS each year on Form 5498. For stocks and bonds, valuation is automatic. For real estate, the burden falls on you to supply the custodian with a defensible value. Many custodians accept a comparative market analysis from a licensed real estate agent for routine annual reporting. Some accept a county tax assessor value. For taxable events like Roth conversions or required minimum distributions, a professional appraisal is the safer choice. Appraisals for single-family homes generally cost $625 to $1,000.
Traditional IRAs require you to start taking distributions at age 73. If your IRA holds nothing but an illiquid property and a thin cash balance, meeting that requirement gets complicated. You have a few options:
- Take the RMD from accumulated rental cash sitting in the IRA
- Distribute a fractional ownership interest in the property to yourself in kind, with the fair market value of that interest counting toward the RMD and reported as taxable income
- Aggregate across accounts: if you have another IRA holding liquid investments, you can calculate the RMD for each account separately but withdraw the total from whichever account has the liquidity
Plan for RMDs well before you reach 73. If the property isn’t generating enough rental cash flow to cover distributions, you may need to sell it or hold other liquid assets in a separate IRA. Missing an RMD triggers a 25% excise tax on the shortfall.
Selling the Property
When you sell, the process mirrors the purchase in reverse. You direct the custodian to list and sell the property, or handle the sale through your LLC under the checkbook structure. All sale proceeds must be deposited back into the IRA. You cannot receive any of the money directly. The disqualified person rules apply on the way out as well: you cannot sell to yourself, your spouse, your children, or any entity they control. Selling to an unrelated third party at fair market value is fine.
Inside a traditional IRA, sale proceeds remain tax-deferred. There is no capital gains tax at the time of sale, and you pay ordinary income tax only when you eventually withdraw money from the IRA. Inside a Roth, qualified withdrawals are tax-free entirely. A property that doubles in value inside a Roth generates zero capital gains tax, ever, if the Roth distribution rules are met.
Fees to Expect
Self-directed IRA custodians charge significantly more than a standard brokerage IRA, which often has no annual fee at all. Expect an account setup fee of around $50, annual recordkeeping fees that scale with asset value (commonly $200 to $400 per year for smaller accounts and potentially over $2,000 for larger ones), and transaction fees of $175 to $250 each time the IRA buys or sells property. Wire fees of $30 to $50 apply each time the custodian moves money.
Beyond custodian fees, budget for the same costs you’d face owning property personally: appraisals, inspections, property management, insurance, property taxes, and maintenance. All of these come out of IRA cash and directly reduce the balance available for growth. Keeping a healthy cash reserve inside the account isn’t optional. Running short forces a choice between violating prohibited transaction rules and letting the property fall into disrepair.