Can I Invest in Real Estate With My IRA?

Individual Retirement Accounts (IRAs) serve as a foundational savings vehicle for many individuals. While often associated with traditional investments like stocks, bonds, and mutual funds, investing in real estate through an IRA is possible. This strategy requires adherence to specific account structures and Internal Revenue Service (IRS) regulations. It allows for potential diversification and growth, but necessitates a clear understanding of the rules.

The Role of Self-Directed IRAs

To invest in real estate within a retirement account, a Self-Directed IRA (SD-IRA) is required. Unlike conventional IRAs offered by most brokerage firms, SD-IRAs are designed to hold a wider array of alternative assets, including physical real estate. Traditional IRA custodians do not offer real estate as an investment option.

An SD-IRA custodian or administrator acts as the legal holder of the assets. This entity ensures all transactions comply with IRS rules and manages record-keeping and IRS reporting for alternative investments. The custodian’s role is administrative, processing transactions and maintaining custody of assets on behalf of the IRA owner.

Various types of IRAs can be self-directed, providing flexibility based on an individual’s tax situation and retirement goals. These include Traditional IRAs, which offer tax-deferred growth, and Roth IRAs, which allow for tax-free withdrawals in retirement. SEP (Simplified Employee Pension) IRAs and SIMPLE (Savings Incentive Match Plan for Employees) IRAs can also be self-directed, extending these opportunities to small business owners and their employees.

Permissible Real Estate Investments and Prohibited Transactions

A Self-Directed IRA can hold various types of real estate, provided the investment is solely for the benefit of the retirement account. This includes residential properties like single-family homes, duplexes, and apartment buildings. Commercial properties, raw land, agricultural land, and real estate-backed notes or mortgages are also permissible investments.

Understanding and strictly avoiding “prohibited transactions” with “disqualified persons” is essential. Disqualified persons include the IRA owner, their spouse, lineal ascendants and descendants, and their spouses, as well as certain fiduciaries. These IRS rules prevent self-dealing and ensure the IRA remains a retirement savings vehicle.

Prohibited transactions include using an IRA-owned property for personal benefit, such as living in it or vacationing there. Selling a property between the IRA and a disqualified person, or borrowing money from the IRA, is also forbidden. Providing personal services to the IRA-owned property without fair compensation, or using IRA assets as collateral for a personal loan, are prohibited.

Engaging in a prohibited transaction can lead to the disqualification of the entire IRA. If disqualified, its entire value may be considered a taxable distribution in the year the transaction occurred. This immediate taxation can result in a significant tax liability and additional penalties.

Key Tax Implications

Real estate held within a Self-Directed IRA benefits from the same tax advantages as other IRA investments. Growth is either tax-deferred in a Traditional IRA or tax-free in a Roth IRA. Rental income and capital gains from IRA-owned property accumulate within the account without immediate taxation, allowing for tax-shielded compounding returns.

Unrelated Business Taxable Income (UBIT) is a significant tax consideration for real estate held in an IRA. UBIT can be triggered if the IRA engages in an active trade or business, such as operating a hotel, rather than collecting passive rental income. UBIT also applies to Unrelated Debt-Financed Income (UDFI), which arises when debt, like a non-recourse loan, is used to acquire or improve real estate within the IRA.

If a property is purchased with a non-recourse loan, the income or capital gains attributable to that debt financing may be subject to UBIT. The tax rate for UBIT on IRA income is based on trust tax rates, which can be as high as 37% for tax years through 2025. If an IRA expects to have $1,000 or more in gross UBIT income, it must file IRS Form 990-T, “Exempt Organization Business Income Tax Return,” and pay estimated taxes quarterly.

All property-related expenses, including property taxes, insurance premiums, maintenance costs, and management fees, must be paid directly from the IRA’s funds. The IRA owner cannot personally pay these expenses. All rental income generated by the property must flow directly back into the IRA.

Establishing and Managing a Real Estate IRA

Establishing a Self-Directed IRA for real estate begins with selecting a suitable custodian or administrator. Choose a reputable firm specializing in alternative assets and real estate. Evaluate custodians based on their fee structure, services, and experience with real estate transactions within an IRA.

Once a custodian is chosen, fund the Self-Directed IRA. Funds can be rolled over from an existing retirement account, such as a Traditional IRA, Roth IRA, or a 401(k). New contributions can also be made directly to the SD-IRA, adhering to annual contribution limits set by the IRS. The custodian facilitates these transfers, ensuring compliance with all regulatory requirements.

Acquiring real estate involves a specific titling process. The property must be purchased and legally titled in the IRA’s name, typically “Custodian Name FBO [Your Name] IRA.” The IRA owner cannot personally sign contracts or handle funds directly. The custodian executes all transaction paperwork, transfers funds for purchase, and ensures proper asset titling.

Ongoing management and compliance require diligent attention. All income generated by the property, such as rental payments, must be deposited directly into the IRA account. All expenses related to the property, including repairs, utilities, and management fees, must be paid directly from the IRA’s funds. The IRA owner cannot perform personal services or “sweat equity” on the property, nor personally cover expenses. Annual valuations of real estate held within the IRA are typically required for reporting purposes.