How to Buy Real Estate with an IRA: Rules, Risks, and Stepâ€‘byâ€‘Step Guide

Can You Buy Real Estate with an IRA?

Yes-real estate purchases are allowed when you use a
self-directed IRA
(SDIRA) administered by a qualified custodian that permits alternative assets. Traditional brokerage IRAs typically restrict holdings to marketable securities; you need a self-directed account to hold property. According to leading retirement planning guidance, SDIRAs enable real estate investing, but you cannot use or personally benefit from the property, and all income and expenses must flow through the IRA [1] . Industry best-practice articles echo that SDIRAs can hold real estate while maintaining arm’sâ€‘length rules that prevent you or related parties from using or managing the property personally [2] .

Key Rules You Must Follow

Buying property with retirement funds carries strict compliance requirements. Understanding them up front will help you avoid inadvertent prohibited transactions and costly penalties.

1) Use a Self-Directed IRA and an Approved Custodian

Only a self-directed IRA can hold real estate directly. Many mainstream custodians don’t permit alternative assets, so you typically open or roll over to an SDIRA that allows real estate and processes purchase/expense transactions on behalf of your account. This structural step is essential to maintain tax advantages and proper recordkeeping [1] .

2) Prohibited Transactions and Disqualified Parties

IRS rules prohibit “self-dealing.” You and other disqualified persons (such as your spouse, lineal ascendants/descendants, and certain fiduciaries) cannot use the property, rent it, sell to/from the IRA, or provide services to it. Even seemingly minor actions-like personally fixing a faucet or letting a family member stay at the home-can trigger a prohibited transaction, which may cause the IRA’s investment to be treated as a taxable distribution [1] . Third parties must handle operations; you cannot personally manage or improve the property [2] .

3) All Income and Expenses Flow Through the IRA

Every dollar in and out must move via the SDIRA. Rent must be paid to the IRA, and expenses like taxes, insurance, HOA fees, repairs, and property management must be paid by the IRA. You should maintain sufficient cash in the IRA to fund ongoing costs and contingencies to remain compliant [1] .

4) UBIT and Leverage Considerations

If your IRA uses debt financing (often via
non-recourse
loans) or engages beyond passive rental activity, the IRA may owe Unrelated Business Income Tax (UBIT) and potentially need to file Form 990â€‘T. UBIT can apply to leveraged rental income and certain operational activities, so plan for tax compliance when using financing and consult qualified tax advisors on Form 990â€‘T filing requirements [3] .

What You Can and Cannot Do

Permitted (with a Self-Directed IRA)

– Buy residential rentals, commercial buildings, land, or other real property through the SDIRA, with title held by the custodian for the benefit of the IRA. – Hire third-party property managers, contractors, and vendors who are not disqualified persons. – Receive rental income into the IRA and pay expenses from the IRA [2] [1] .

Prohibited

– Personal use by you or family (including occasional stays). – Sweat equity, DIY repairs, or furnishing with your personal items. – Transactions with disqualified persons (e.g., buying from or renting to your lineal family). Violations can cause disqualification and taxation of the investment [1] .

Financing Options and Structures

SDIRA real estate can be purchased with cash in the account or combined strategies. Each approach has operational and tax implications.

1) Cash Purchase

Buying outright with IRA funds keeps administration simpler. There is no loan underwriting, and UBIT linked to acquisition indebtedness generally does not arise for passive rental income. The tradeoff is capital intensity; ensure adequate cash reserves remain in the IRA for expenses and vacancies [1] .

2) Non-Recourse Financing

Some lenders offer non-recourse loans to IRAs, where the collateral is the property and the borrower is the IRA (not you personally). Because debt is involved, a portion of income may be subject to UBIT, and the IRA may need to file Form 990â€‘T. Underwriting often requires larger down payments and conservative DSCRs. Plan for higher closing costs and buffers for debt service [3] .

3) Partnering and Syndications

Some investors partner an SDIRA with other investors’ IRAs or with non-disqualified third parties during the initial purchase. Partnership allocations of expenses and income must follow capital contributions and be handled at arm’s length through the IRA. After closing, avoid transactions with disqualified parties to remain compliant. Industry guides describe common strategies such as partnering or using indirect vehicles like REITs when direct ownership feels too complex [4] .

Step-by-Step: How to Buy Property with an IRA

Step 1: Confirm SDIRA Eligibility and Open the Right Account

Speak with a custodian that permits real estate in a self-directed IRA. If you currently have a traditional or Roth IRA elsewhere, you can often transfer or roll funds to the SDIRA. Verify fees, processing timelines, asset support, and expense payment procedures. This is foundational to compliance and ongoing administration [1] .

Step 2: Fund the Account

Move capital via trustee-to-trustee transfer or rollover, or make new contributions if eligible. Ensure enough liquidity for purchase price, closing costs, insurance, reserves, and initial repairs-paid from the IRA, not personal funds [1] .

Step 3: Select Investment Strategy

Choose between direct ownership, partnering, or indirect real estate exposure. Direct ownership offers control and potential cash flow but requires strict operational discipline. Partnering can increase buying power but adds documentation and allocation tracking. Indirect exposure (e.g., public REITs held in a regular IRA) may simplify management but differs from direct property control. Industry resources outline these options for SDIRAs in detail [4] .

Step 4: Underwrite the Property and Prepare the Offer

Conduct due diligence just as a professional investor would: verify rents, expenses, local regulations, inspection findings, and insurance costs. Title and escrow documents should list the buyer as your custodian “for benefit of” your IRA, not your personal name. Offers and earnest money must come from the IRA per custodian procedures [2] .

Step 5: Arrange Property Management and Vendors

Engage third-party management for leasing, rent collection, and maintenance. You cannot personally perform services or use personal funds. Keep invoices addressed to and paid by the IRA. Document vendor independence and avoid any disqualified relationships to reduce prohibited transaction risk [1] .

Step 6: Plan for Taxes and Filings (If Leveraged)

If the IRA uses financing or engages beyond passive rental activity, evaluate UBIT exposure. Work with a CPA experienced in IRA real estate to determine if Form 990â€‘T applies and to estimate quarterly tax payments where relevant. This planning can preserve afterâ€‘tax returns and prevent filing penalties [3] .

Step 7: Operate with Compliance Discipline

Keep a cash buffer in the IRA for repairs, insurance, taxes, and vacancy. Route all receipts and disbursements through the custodian as required. Avoid personal involvement in improvements or tenant interactions beyond high-level direction to your manager. Maintain documentation for audits and custodian reviews [1] .

Real-World Examples

– Cash Purchase Single-Family Rental: An investor with a funded SDIRA purchases a $210,000 rental home cash. A third-party manager handles leasing and maintenance. The IRA receives monthly rent and pays expenses, maintaining a 6-month reserve. With no debt, UBIT considerations on rental income generally do not arise. Compliance hinges on zero personal use and arm’s-length operations [1] . – Leveraged Small Multifamily: Another investor secures a non-recourse loan within the IRA to acquire a duplex. Because debt is used, a portion of net rental income may be subject to UBIT, requiring Form 990â€‘T analysis and potential payments from IRA funds. Strong bookkeeping and tax support are essential [3] . – Partnered Purchase at Closing: An SDIRA partners with an unrelated investor’s IRA on a fourplex, each contributing 50% at acquisition. The operating agreement allocates income/expenses pro rata. After closing, they avoid any transactions with disqualified parties and rely on third-party management to remain compliant [4] .

Common Pitfalls and How to Avoid Them

– Personal Use Temptation: Even a single personal night stay or letting family visit can constitute a prohibited transaction. Use strict written policies with your manager to prevent access violations [1] . – Paying Expenses Personally: Never pay property bills from your checking account. Keep adequate IRA liquidity and set up custodian bill-pay workflows to avoid mistakes [1] . – DIY Repairs: Hiring licensed, unrelated vendors helps preserve compliance and documentation. Even small fixes should be outsourced [1] . – Overlooking UBIT: If leveraging, model afterâ€‘tax yields that include potential UBIT and filing costs. Engage a tax professional familiar with IRA real estate [3] .

Alternatives If Direct Ownership Feels Complex

Some investors prefer indirect real estate exposure due to the operational rigor of direct ownership. Publicly traded REITs can be held in a standard IRA at most brokerages without the specialized SDIRA infrastructure, offering diversification and liquidity-though they differ from owning a specific property. Industry resources also discuss indirect approaches like private notes or diversified vehicles, each with unique risk/return and diligence requirements [4] .

Action Plan to Get Started

1) Identify an SDIRA custodian that permits real estate and request their real estate investment packet and fee schedule. 2) Transfer or roll over sufficient funds and set up cash reserves for contingencies. 3) Decide on purchase method (cash, non-recourse loan, or partnership) and engage a CPA familiar with UBIT and Form 990â€‘T when leverage is contemplated. 4) Retain a property manager and independent vendors; avoid disqualified persons. 5) Prepare offers with the IRA’s titling format and ensure all funds move through the custodian. 6) Implement monthly controls: rent collection to the IRA, custodian bill pay, reserve targets, and periodic compliance reviews with your advisor.

Important Distinction: IRAs vs. 401(k)s

While SDIRAs can purchase real estate directly, employer 401(k) plans usually do not permit direct real estate ownership under plan rules. Some articles note that 401(k)s are commonly restricted to marketable securities, though there are workarounds (such as plan loans or rollovers) depending on the plan document. Always review your plan’s investment policy and allowable assets before pursuing real estate exposure within a 401(k) [2] .

References

[1] Edelman Financial Engines (2024). Downsides and rules when buying real estate with an IRA. [2] Trion Properties (2021). Should you buy investment property with an IRA or 401(k)? [3] Cherry Bekaert (2024). How to stay compliant with IRA real estate rules, UBIT, and Form 990â€‘T. [4] The Entrust Group (2024). Self-directed IRA real estate basics, strategies, and partnering.