Self-Directed IRA Real Estate Investing

A self-directed IRA can own rental property: the IRA holds title through its custodian, collects all of the rent, and pays every expense from the account. You and close family members cannot buy the property from the IRA, sell it to the IRA, live in it, or work on it, and one prohibited transaction ends the IRA's tax status for the entire account. If the IRA borrows to buy, the loan must be non-recourse, and part of the profit is taxed each year on Form 990-T. You also give up the depreciation deductions and capital gains rates you would get by owning the rental yourself.

How an IRA buys and holds a rental

An IRA custodian must be a bank, a federally insured credit union, a savings and loan association, or another entity the IRS approves. A self-directed custodian is one that allows assets such as real estate; it holds title for the IRA and carries out the purchases and payments you direct. A February 2023 alert from the SEC, FINRA, and state securities regulators warns that these custodians do not evaluate an investment or its promoters and that their fees can be significantly higher than on other accounts, so get the full fee schedule in writing before you move money.

Contributions must be in cash, so you cannot put a property you already own into the IRA. For 2026, you can contribute up to $7,500, or $8,600 if you are 50 or older, across all your traditional and Roth IRAs combined, and no more than your taxable compensation, which does not include rental income. For direct Roth contributions in 2026, the limit gradually falls to zero as modified adjusted gross income (income adjusted under IRS rules) rises from $153,000 to $168,000 for single or head-of-household filers, or from $242,000 to $252,000 for married couples filing jointly. To fund a larger purchase, you can transfer money from another IRA or roll over money from a former employer's retirement plan.

Prohibited transactions and disqualified persons

Federal tax law bars any direct or indirect sale, lease, loan, or service between your IRA and a disqualified person, and any use of IRA income or assets for a disqualified person's benefit. Disqualified persons include:

• You and any other fiduciary, meaning anyone with authority over the account or paid to advise on it.
• Your spouse, parents, grandparents, and other ancestors, and your children, grandchildren, and other descendants and their spouses.
• Companies, partnerships, and trusts that you and these relatives own 50% or more of.

Siblings, cousins, and friends are not on the list, but a deal that benefits you indirectly can still be prohibited. For a rental, these are the common violations:

• Buying a property that you or another disqualified person owns, or selling the IRA's property to one.
• Renting the property to a disqualified person, or using it yourself, even for a weekend.
• Doing repairs or other work on the property yourself, or hiring a company that you or your family own 50% or more of.
• Personally guaranteeing the IRA's mortgage, which the Department of Labor treats as an extension of credit from you to the IRA.
• Depositing rent into your own account instead of the IRA's.

If you or your beneficiary engages in a prohibited transaction, the account stops being an IRA as of January 1 of that year and is treated as paying out all of its assets to you at fair market value. For a traditional IRA, that value minus any after-tax contributions is taxable income for the year, and a 10% additional tax applies if you are under 59½. A 52-year-old with a $400,000 IRA and no after-tax contributions would add $400,000 to taxable income and owe a $40,000 additional tax. Only the IRA involved loses its status, so holding the rental in its own IRA limits the damage of a mistake.

Borrowing inside the IRA

Because you cannot guarantee the loan, a mortgage on IRA property has to be non-recourse: if the loan defaults, the lender can take the property but cannot collect from you or from the rest of the account. Income from property bought with borrowed money is called unrelated debt-financed income, and the IRA owes tax on the borrowed share of it:

• Yearly income: the taxable share is the property's average loan balance for the year divided by its average adjusted basis (cost minus depreciation), applied to both the rent and the deductions. Depreciation must be straight-line, the same amount each year.
• A sale: if any of the loan was outstanding during the 12 months before the sale, part of the gain is taxed too, though long-term gain can use the lower capital gains rates. Paying off the loan more than 12 months before you sell keeps the gain out of this tax.
• Filing: the custodian files Form 990-T for the IRA when the debt-financed share of gross income is $1,000 or more, by April 15 for a calendar-year IRA. The first $1,000 of net income is deducted before tax, the IRA pays the tax from its own cash, and it must make quarterly estimated payments if it expects to owe $500 or more.
• Rates: the IRA pays trust tax rates, which for 2026 start at 10% on the first $3,300 of taxable income and reach 37% above $16,000.

A Roth IRA owes this tax too. Debt that a qualified employer plan, such as a solo 401(k), takes on to buy real estate is generally exempt.

Example. An IRA buys a $300,000 rental with $180,000 of cash and a $120,000 non-recourse loan, so for the first year its average debt is about 40% of its average basis. The rental collects $30,000 of rent and nets $6,000 after expenses, interest, and straight-line depreciation. Using 40%:

1. Debt-financed gross income: 40% x $30,000 = $12,000, over $1,000, so the custodian must file Form 990-T.
2. Debt-financed net income: 40% x $6,000 = $2,400.
3. Tax: ($2,400 minus the $1,000 deduction) x 10% = $140, paid from the IRA.

Cash, repairs, and required minimum distributions

The IRA pays every property cost from its own cash: property taxes, insurance, repairs, vacancies, management, and any Form 990-T tax. New money can come in only as a yearly contribution within the limit or as a transfer or rollover, so keep reserves in the account from the start. The exception is the custodian's administrative fees: when they are billed separately, you can pay them from outside the account without using your contribution limit.

Required minimum distributions (RMDs), the yearly withdrawals a traditional IRA must make, are harder to meet when most of the account is a building:

• Timing: the first RMD is due by April 1 of the year after you reach age 73, or 75 if you were born in 1960 or later. Each later RMD is due by December 31.
• Amount: each year's RMD is the account's value on the prior December 31, including the property's appraised value, divided by an IRS life expectancy factor, so plan on a yearly valuation of the property.
• Cash to pay it: if you own more than one traditional IRA, you can take their combined RMD from any of them. If none has the cash, the IRA has to sell the property or deed you a percentage interest in it, and you owe income tax on the value of that share.
• Penalty: a missed RMD triggers a 25% excise tax on the shortfall, or 10% if you take the missed amount and report the tax within the IRS correction window, which generally closes at the end of the second year after the year you missed. The IRS may waive some or all of this tax if the shortfall resulted from reasonable error and you are taking reasonable steps to correct it. Request a waiver by filing Form 5329 with an explanation.

A Roth IRA has no RMDs during your lifetime.

What you give up compared with owning the rental yourself

A qualified Roth withdrawal is generally one made after age 59½ and after the 5-year period that starts with the first year you contributed to a Roth IRA. Outside an IRA, you deduct the building's cost over 27.5 years, as depreciation on rental property shows, and holding the rental through an LLC usually leaves its federal tax unchanged. Capital gains tax on investment property covers the 2026 rate brackets, and tax planning strategies for rental property income covers your other rental taxes.