Real estate in a self-directed IRA: the rules, the tax, and the trade-off

You can buy a rental house, a piece of land, or a share of a real estate fund inside your IRA. That surprises a lot of people, including some accountants. But it is allowed, and it has been allowed for as long as IRAs have existed.¹ What the ads for these accounts rarely explain is the fine print. Part of that fine print can cost you the entire account. Part of it quietly taxes an account that is supposed to grow tax-free. And one part of it means the single biggest tax advantage of owning real estate disappears the moment you put the property inside an IRA. Here is the whole picture, in plain English.

Part I — What your IRA can actually own

The law works backwards from what most people expect. There is no list of approved IRA investments. There is a short list of banned ones, and everything else is allowed.

Only two things are off limits. An IRA cannot buy life insurance contracts, and it cannot buy collectibles — art, rugs, antiques, gems, stamps, most coins, and alcoholic beverages.¹ Certain gold, silver, platinum, and palladium bullion and certain U.S. coins are carved out of the collectibles ban, as long as the trustee holds them.¹

Real estate is not on the banned list. So a rental house, an apartment building, raw land, a commercial building, a mortgage note, and an interest in a real estate fund are all things an IRA can hold.

You cannot hold it yourself

An IRA is a trust, and the law requires a trustee — either a bank, or another company that has satisfied the IRS that it will run the account properly.¹ That is not a formality you can skip. It is the definition of the account.

Most large brokerages will not hold a building for you. That is a business decision, not a legal one — real estate is messy to administer. Companies that will hold it are usually called self-directed IRA custodians. "Self-directed" is a marketing term, not a category in the tax code. It is the same IRA you already understand, at a custodian willing to hold unusual assets.

It matters what that custodian does and does not do. It holds title, processes the paperwork, and files the required reports. It does not check whether your investment is sound, fairly priced, or legal. When the Government Accountability Office studied these accounts, it found that owners take on a much larger role than they expect and that custodians may let valuation problems and even fraud go undetected.¹⁵ The oversight you are used to is not there.

Everything runs through the account

The IRA buys the property. You do not. Title is held in the account's name, usually reading something like "ABC Trust Company, Custodian, for the benefit of Jane Doe IRA." Rent is paid to the IRA. Property taxes, insurance, management fees, and repairs are paid out of the IRA.

This has a practical consequence people underestimate: the account needs cash. If the roof fails and the IRA is fully invested, you cannot simply write a check. Your check would be a new contribution, and contributions are capped each year — and depending on how it is done, paying an expense personally can break the rules in the next section.

Part II — The rules that can destroy the account

One idea drives everything here: an IRA is for the person you will be at retirement, not the person you are today. To keep that line clean, the law bans dealings between the account and anyone close to it. These are called prohibited transactions.²

Six kinds of dealing between your IRA and a "disqualified person" are banned:²

• Selling, exchanging, or leasing property
• Lending money or extending credit, in either direction
• Providing goods, services, or facilities, in either direction
• Using the IRA's income or assets for a disqualified person's benefit
• Dealing with the IRA's assets in your own interest
• Taking payment personally from anyone doing business with the IRA

Who counts as a disqualified person

You do. So does your spouse, your parents and grandparents, your children and grandchildren, and the spouses of your children and grandchildren.² So does anyone who provides services to your IRA, and any company, partnership, or trust that those people own half or more of.²

Here is a detail that surprises people: siblings are not on the list. Neither are cousins, aunts, uncles, nieces, or nephews.² As a technical matter, your IRA can generally do business with your brother. That said, a deal built to route a benefit back to someone who is disqualified can still be caught by the benefit rule, so this is a place to get advice rather than get clever.

The rules in plain terms

Translated out of the statute, the traps that catch real people look like this:^2,8

• You cannot use the property. Not to live in, not for a weekend, not to store a boat.
• Your close family cannot rent it, even at full market rent with a signed lease.
• You cannot sell your IRA a property you already own, even at an appraised price in an arm's-length deal.
• You cannot do the work yourself. Painting a unit is providing services to the account. Hire a contractor and pay them from the IRA.
• You cannot personally guarantee the IRA's loan. Any mortgage has to be non-recourse, meaning the lender's only remedy is the property itself.
• You cannot pledge the account as collateral for a loan of your own. Doing so is treated as taking the money out.¹

Courts have enforced all of this without much sympathy. Two taxpayers who personally guaranteed a loan to a company their IRAs owned were found to have made a prohibited extension of credit, and their IRAs lost their status.¹⁶ A man whose IRA capitalized a used-car business took wages from it and lost the account, and the Eighth Circuit affirmed.¹⁷ A woman whose IRA owned an LLC that bought gold coins stored them in a safe at home; the Tax Court held that taking personal possession was a taxable distribution, because she had complete control with no independent oversight.¹⁸

The penalty is the whole account

This is not a fine or a fee. If you or another disqualified person engages in a prohibited transaction, the account stops being an IRA — and not from the date of the mistake. It stops as of the first day of that tax year. Everything in it is treated as paid out to you at its fair market value on that day.¹

That means income tax on the entire balance, plus the early-distribution penalty if you were under 59½, plus interest — usually discovered in an audit years later.

Part III — The tax nobody mentions

The whole point of an IRA is that it does not pay tax while it grows. That is mostly true. There is an exception, and borrowing money is what triggers it.

Two terms, defined once and then used plainly:

• UBIT — unrelated business income tax. A tax that otherwise tax-free accounts pay on certain business income. IRAs are expressly subject to it.^1,3
• UDFI — unrelated debt-financed income. The version that catches real estate investors. It is income from property that was bought with borrowed money.⁵

The normal rule is generous

Rent from real property is excluded from this tax. So is the gain when the property is sold. So are dividends and interest.⁴ An IRA that buys a rental outright, with no mortgage, generally owes nothing.

One condition is worth knowing, because it separates renting space from running a business. The exclusion covers rent for the property. If the owner also provides substantial services to the occupants — the kind of services that go beyond maintaining the space, as a hotel does — the income can stop being rent for this purpose.⁷ Ordinary landlord activity is fine. A service-heavy operation is a question for your CPA.

But there is an override. To the extent the property was bought with debt, those exclusions do not apply.⁴ The borrowed share becomes taxable.

How the taxable share is measured

The rule compares the average debt on the property to the average value of the property on the books.⁵ A $1,000,000 property carrying a $600,000 mortgage is roughly 60% debt-financed, so roughly 60% of the income is exposed. As the loan is paid down, that percentage falls.

Two mechanics soften the number, and one sharpens it:

Expenses come off first. The tax applies to the debt-financed share of net income — after interest, property taxes, insurance, management, repairs, and depreciation.⁵ On a typical leveraged rental, net income is a small number, so the annual tax is often small too.

The first $1,000 is free. Every year the account gets a $1,000 deduction against this income.⁴

But the rates are trust rates, and trust rates are brutal. An IRA is a trust, so it pays on the schedule Congress wrote for trusts and estates.³ For 2026 that schedule is 10% up to $3,300, 24% up to $11,700, 35% up to $16,000, and 37% above $16,000.¹¹ An individual does not reach 37% until several hundred thousand dollars of income. A trust reaches it at sixteen thousand.

The relief that does not reach IRAs

Congress recognized this was harsh for retirement money and wrote an exception. For a "qualified organization," debt used to buy real property is not counted at all — no UDFI.⁵

Then read the list of who qualifies. It covers schools and their support organizations, certain title-holding companies, church retirement income accounts, and "any trust which constitutes a qualified trust under section 401" — which is the pension and 401(k) world.⁵ An IRA is created under a different section of the code, section 408.¹ It is not on the list.

The practical result is worth stating flatly: a solo 401(k) can often own leveraged real estate without this tax. An IRA cannot. If you are self-employed and eligible for a solo 401(k), that is a conversation to have with your CPA before you commit IRA money. The exception also comes with its own conditions, and further rules when the property is held through a partnership, so it is not automatic even for plans that qualify.⁵

Who files, and who pays

If the IRA has $1,000 or more of gross income of this kind in a year, the IRA files a tax return — Form 990-T. Not you; the account.¹⁰ It needs its own employer identification number, the custodian signs and files it, and the tax is paid out of IRA assets, which means the cash has to be in the account.¹⁰ For a calendar-year account the return is due on the fifteenth day of the fourth month after year end — April 15.¹⁰

The sale is where the number shows up

When debt-financed property is sold, the debt-financed share of the gain is taxable too. The share is measured using the highest debt on the property during the 12 months before the sale.⁵

Read that twice, because it contains a planning point. If the debt is fully repaid and stays repaid for more than twelve months before the sale, the gain can come out clean.

There is also relief in the rate. Long-term gain is taxed to a trust on the capital gain schedule rather than the ordinary one — for 2026 that is 0% up to $3,300, 15% up to $16,250, and 20% above that.^11,22 Twenty percent is a far better outcome than thirty-seven, so the character of the income matters as much as the amount.

Part IV — A building of your own vs. a piece of a fund

Both are allowed. They are very different jobs.

Owning a property directly

You find the deal, the IRA buys it, and then you manage an asset you are forbidden to touch. Every repair goes to a contractor the IRA pays. Every rent check and every bill routes through the custodian, often with a form and a fee attached. Most people who quit this strategy quit because of the friction, not the fees.

Owning a fund interest

The IRA subscribes as a limited partner and a K-1 arrives each year. The operating work disappears. The tax question does not.

When an IRA is a partner in a partnership, the partnership's debt is treated as the IRA's debt for this purpose.⁶ Income keeps its character as it passes through to the partner.⁴ So if the fund uses mortgage leverage — and most real estate funds do — the K-1 will carry a debt-financed income figure, and everything in Part III applies to it.

The structural answer: blockers and REIT feeders

Some sponsors offer tax-exempt investors a different way in: a corporation or a REIT that sits between the investor and the fund. That entity pays its own tax, and what reaches the IRA is a dividend — and dividends are excluded from this tax.⁴ It trades an unpredictable annual figure for a predictable layer of entity-level tax. Whether that trade is worth it is arithmetic, not principle. The useful move is to ask a sponsor whether such an option exists before you subscribe.

Why a fund asks whether you are an IRA

Under Department of Labor rules, if retirement accounts — IRAs included — hold 25% or more of a class of equity in a fund, the fund's own assets can be treated as retirement plan assets, which brings a demanding set of fiduciary obligations onto the sponsor.¹⁹ Funds track that percentage and sometimes limit retirement-account subscriptions to stay below it. If a sponsor asks the question on the subscription documents, that is why — and it is a sign they are paying attention.

Part V — What the IRA wrapper costs you

Now the part no custodian's marketing page runs.

Real estate's best-known tax feature is depreciation — the deduction you take each year for wear on the building, which often produces a paper loss on a property that is actually making money. A cost segregation study speeds this up by sorting components of the building into shorter write-off lives, and current law allows a large first-year deduction on that short-life property.²¹ For an investor who can use those deductions, this is the engine of the whole strategy.

Inside an IRA, that engine is disconnected. Twice.

1. The losses cannot reach your return

An IRA's losses stay inside the IRA. They never appear on your Form 1040, because the account is not paying tax on its income in the first place. There is nothing for the deduction to shelter.

2. Where depreciation would help, the fast version is barred

There is exactly one calculation where depreciation matters inside an IRA — the debt-financed income figure from Part III. And in that calculation, the law requires depreciation to be taken on the straight-line method.⁵ Cost segregation and first-year bonus depreciation buy you nothing there. The precise tool that makes leveraged real estate powerful in a taxable account has no effect inside the account.

3. And a third cost, on the way out

Money leaving a traditional IRA is ordinary income, no matter what the account held.¹ Real estate owned personally for more than a year produces long-term capital gain instead, taxed at lower rates, with the depreciation piece recaptured at no more than 25%.⁹ Put the same building in a traditional IRA and you have converted the most favorably taxed kind of income into the least favorably taxed kind.

A Roth IRA changes this last point — qualified Roth withdrawals are not taxed at all.²⁰ It does not change the first two. A Roth still owes tax on debt-financed income along the way.

So when does the wrapper make sense?

The fair answer is not "never." It is this. An IRA is a good home for an investment whose return is ordinary income you could not shelter anyway — a mortgage note, a private loan, an unlevered property with steady rent. It is a poor home for a heavily depreciating, heavily leveraged building, which is precisely the investment that generates the most tax benefit when held outside an IRA.

If you hold both taxable dollars and IRA dollars, the question is not "can my IRA buy this?" It can. The question is "of all my dollars, are these the right ones?" — and that is a question for your CPA, with your real numbers. Our companion piece on real estate professional status covers the other side of it: how directly-owned real estate losses can reach your return when you are not using an IRA.

Part VI — Valuing it, reporting it, and getting out

Three practical problems that arrive after the purchase is done.

Somebody has to value it every year

Custodians report your account's value to the IRS annually on Form 5498. For a stock or a mutual fund that is automatic. For a building or a fund interest it is not. The form has a box for the value of hard-to-value assets and a code identifying the type — D for real estate, E for a partnership interest.¹⁴ Someone must produce that number every single year. A fund will usually supply it. A directly-owned building may need an appraisal, at your cost and on your initiative.

The withdrawal rule meets an asset you cannot slice

With a traditional IRA you must begin taking money out at age 73, and for people who turn 74 after 2032 that rises to 75.^12,13 The required amount is a percentage of the account's value. Miss it and the excise tax is 25%, falling to 10% if you correct it promptly.¹²

Now set that against a duplex. You cannot sell 4% of a building. Either the IRA holds enough cash, or you hold other IRA assets you can sell, or you distribute the property itself and take a taxable event you did not choose the timing of. Roth IRAs have no required withdrawals during your lifetime, which is one genuine argument for holding illiquid assets in a Roth rather than a traditional IRA.^12,20

Getting out takes time

Selling a property takes months. Fund interests are frequently locked up for years and usually cannot be transferred without the sponsor's consent. Illiquidity is the one drawback the custodian pages do mention, and it compounds with the withdrawal rule above rather than sitting beside it.

Nobody is checking your work

When the Government Accountability Office reviewed these accounts, it found custodians holding nearly half a million accounts with unconventional assets, and warned that owners often do not realize the account owes tax and struggle to produce the annual valuation the IRS requires — with custodians in a poor position to catch either problem.¹⁵ Run the account as if no one else is watching, because largely no one is.

Part VII — Quick answers

Can I buy a house now and retire into it later?

Not while the IRA owns it. It has to be an investment property the entire time it is in the account. To live in it, the IRA must distribute it to you first — a taxable event at the property's fair market value. Using it before then is a prohibited transaction that can end the account.^1,2

Does a Roth IRA avoid the debt-financed tax?

No. Roth IRAs follow the same rules here. Qualified Roth withdrawals come out tax-free, but the account still owes tax on debt-financed income along the way and still files the return.^20,10

Can I do a 1031 exchange inside my IRA?

You do not need to. A 1031 exchange defers tax on a sale, and the IRA generally is not taxed on the sale, so there is nothing to defer.⁴ If the property was bought with debt, the move that matters is repaying the debt more than twelve months before selling — not an exchange.⁵

Who actually files the 990-T?

The IRA does, through the custodian, and the tax comes out of IRA money. The account needs its own EIN.¹⁰ Custodians differ on whether they prepare the return, charge for it, or expect you to have it prepared — ask before you invest, not the following March.

What about a "checkbook IRA" LLC?

An IRA can own an LLC, and the LLC can hold the property, which does cut down the paperwork. But the rules follow the money into the LLC, and the courts have not been forgiving. Paying yourself from your IRA's LLC ended one taxpayer's account.¹⁷ Taking personal possession of the LLC's assets was a taxable distribution for another.¹⁸ The structure removes friction. It does not remove rules.

My accountant says an IRA cannot own real estate.

Many professionals believe that, usually because their own firm's platform does not offer it. It is allowed.^1,8 The more useful question to put to your accountant is the one in Part V — not whether it can go in the account, but whether it should.

The bottom line

An IRA can own real estate. Whether it should is a different question, and the answer turns on three things the sales page will not raise.

First, the prohibited transaction rules are strict and the penalty is the entire account, backdated to January 1 of the year you break them.^1,2 Second, borrowed money brings a tax into your tax-free account at trust rates that reach 37% at $16,000 of income — and the relief Congress wrote for leveraged real property covers 401(k)-style plans, not IRAs.^5,11 Third, the wrapper discards the depreciation benefit that makes real estate worth owning in the first place, and turns capital gain into ordinary income on the way out.^5,1

None of that makes it wrong in every case. Notes, unlevered property, and Roth dollars all change the arithmetic, and for an investor with no taxable capital to deploy, an IRA may be the only capital available. It does mean the honest version of the question is not "can my IRA buy this?" — it can — but "of everything I own, are these the right dollars for this?"

Sources

1. 26 U.S.C. §408 — Individual retirement accounts: §408(a) (trust requirement; the trustee must be a bank or a person approved by the Secretary), §408(a)(3) (no life insurance), §408(d)(1) (distributions taxed as ordinary income), §408(e)(1) (the account is exempt from tax but is subject to the unrelated business income tax of §511), §408(e)(2) (a prohibited transaction ends the account as of the first day of the taxable year, with all assets treated as distributed at fair market value), §408(e)(4) (using the account as security for a loan), §408(m) (collectibles, and the bullion and coin exceptions). https://www.law.cornell.edu/uscode/text/26/408
2. 26 U.S.C. §4975 — Prohibited transactions: §4975(c)(1)(A)–(F) (the six prohibited dealings), §4975(e)(2) (disqualified persons, including fiduciaries, service providers, family members, and entities 50% owned by them), §4975(e)(6) (family means spouse, ancestor, lineal descendant, and any spouse of a lineal descendant — siblings are not included), §4975(c)(3) (special rule where §408(e)(2)(A) or §408(e)(4) applies). https://www.law.cornell.edu/uscode/text/26/4975
3. 26 U.S.C. §511 — Imposition of tax on unrelated business income: §511(b) imposes the tax on trusts and directs that it be computed as provided in §1(e), the rate schedule for estates and trusts. https://www.law.cornell.edu/uscode/text/26/511
4. 26 U.S.C. §512 — Unrelated business taxable income: §512(b)(1) (dividends and interest excluded), §512(b)(3) (rents from real property excluded, with exceptions), §512(b)(4) (the exclusions in (b)(1), (3), and (5) do not apply to debt-financed property), §512(b)(5) (gains from disposition excluded), §512(b)(12) (the $1,000 specific deduction), §512(c)(1) (a partner's share of partnership income is taken into account, with its character). https://www.law.cornell.edu/uscode/text/26/512
5. 26 U.S.C. §514 — Unrelated debt-financed income: §514(a)(1) (the debt/basis percentage — average acquisition indebtedness over average adjusted basis), §514(a) (depreciation for this purpose "shall be computed only by use of the straight line method"; on a sale, the percentage uses the highest acquisition indebtedness during the 12-month period ending with the disposition), §514(b) (debt-financed property), §514(c)(1) (acquisition indebtedness), §514(c)(9) (the exception for qualified organizations acquiring real property, and §514(c)(9)(C) listing them — including "any trust which constitutes a qualified trust under section 401," which does not describe an IRA created under §408). https://www.law.cornell.edu/uscode/text/26/514
6. Treas. Reg. §1.514(c)-1 — Acquisition indebtedness, including the treatment of an exempt organization that is a partner in a partnership: the organization's allocable share of the partnership's indebtedness incurred to acquire income-producing property is taken into account in computing its debt/basis percentage. https://www.law.cornell.edu/cfr/text/26/1.514(c)-1
7. Treas. Reg. §1.512(b)-1 — Modifications to unrelated business taxable income, including the scope of the exclusion for rents from real property and the treatment of services rendered to occupants. https://www.law.cornell.edu/cfr/text/26/1.512(b)-1
8. IRS Publication 590-A, "Contributions to Individual Retirement Arrangements (IRAs)" — plain-language treatment of what an IRA may hold, the trustee requirement, prohibited transactions, and the consequences of engaging in one. https://www.irs.gov/publications/p590a
9. IRS Publication 544, "Sales and Other Dispositions of Assets" — gain on disposition, depreciation recapture, and unrecaptured section 1250 gain (the treatment that applies to property held outside a retirement account). https://www.irs.gov/publications/p544
10. IRS, Instructions for Form 990-T, "Exempt Organization Business Income Tax Return" — trustees of IRAs with $1,000 or more of gross unrelated trade or business income must file; each account is treated as a separate trust and must have its own EIN; the return is due by the 15th day of the 4th month after the end of the tax year. https://www.irs.gov/instructions/i990t
11. Rev. Proc. 2025-32 — inflation-adjusted items for 2026. Table 5 (§1(j)(2)(E)), Estates and Trusts: 10% of taxable income not over $3,300; $330 plus 24% of the excess over $3,300; $2,346 plus 35% of the excess over $11,700; and $3,851 plus 37% of the excess over $16,000. Section 4.03 gives the 2026 capital gain breakpoints for estates and trusts: a maximum zero-rate amount of $3,300 and a maximum 15% rate amount of $16,250. https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
12. IRS, "Retirement plan and IRA required minimum distributions FAQs" — the required beginning age, the absence of lifetime required distributions for Roth IRAs, and the 25% excise tax for a missed distribution, reduced to 10% if timely corrected. https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
13. 26 U.S.C. §401(a)(9)(C)(v) — the "applicable age" for required minimum distributions: 73 for individuals who attain age 72 after December 31, 2022 and age 73 before January 1, 2033; 75 for individuals who attain age 74 after December 31, 2032. https://www.law.cornell.edu/uscode/text/26/401
14. IRS, "Form 5498 — asset information reporting codes and common errors" — boxes 15a and 15b report the fair market value and type of assets without a readily available value, using code D for real estate and code E for an ownership interest in a partnership, trust, or similar entity. https://www.irs.gov/retirement-plans/form-5498-asset-information-reporting-codes-and-common-errors
15. U.S. Government Accountability Office, GAO-17-102, "Retirement Security: Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets" (December 2016) — 17 of 26 custodians surveyed reported nearly half a million accounts holding unconventional assets; owners take on expanded responsibility, may not recognize unrelated business taxable income, and may struggle to supply annual fair market values. https://www.gao.gov/products/gao-17-102
16. Peek v. Commissioner, 140 T.C. 216 (2013) — taxpayers who personally guaranteed a promissory note of a company owned by their IRAs made an indirect extension of credit to the IRAs under §4975(c)(1)(B), a prohibited transaction; the accounts lost their status. Reported in volume 140 of the Reports of the United States Tax Court, indexed at https://www.courtlistener.com/c/tc/140/
17. Ellis v. Commissioner, No. 14-1310 (8th Cir. June 5, 2015), 787 F.3d 1213, aff'g T.C. Memo. 2013-245 — wages paid to the IRA owner by an LLC his IRA had capitalized were a transfer of plan assets for his own benefit under §4975(c)(1)(D) and self-dealing under §4975(c)(1)(E); the IRA lost its status and its full value was taxable. https://ecf.ca8.uscourts.gov/opndir/15/06/141310P.pdf
18. McNulty v. Commissioner, 157 T.C. No. 10 (Nov. 18, 2021) — an IRA owner who took physical possession of coins purchased through an IRA-owned "checkbook control" LLC received a taxable distribution; the court emphasized her unfettered command over the assets and the absence of independent custodial oversight. https://www.leagle.com/decision/intco20211118j44
19. 29 C.F.R. §2510.3-101 — the Department of Labor's "plan assets" regulation, as modified by ERISA §3(42): equity participation by benefit plan investors is significant, and the entity's underlying assets may be treated as plan assets, if 25% or more of the value of any class of equity interests is held by benefit plan investors. https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-B/part-2510/section-2510.3-101
20. 26 U.S.C. §408A — Roth IRAs: a Roth IRA is treated in the same manner as an individual retirement plan except as otherwise provided, with qualified distributions excluded from gross income. https://www.law.cornell.edu/uscode/text/26/408A
21. 26 U.S.C. §168 — MACRS depreciation: the 27.5-year residential and 39-year nonresidential recovery periods, the shorter-life property classes a cost segregation study identifies, and additional first-year (bonus) depreciation under §168(k). https://www.law.cornell.edu/uscode/text/26/168
22. IRS, Instructions for Schedule D (Form 1041), "Capital Gains and Losses" — the schedule a trust uses to compute tax on net capital gain at the rates available to estates and trusts, referenced by the Form 990-T tax computation. https://www.irs.gov/instructions/i1041sd