Real Estate in an IRA
Holding real estate inside an individual retirement account allows investors to diversify retirement savings beyond stocks and bonds. Known as self-directed IRA real estate, this strategy can include residential rentals, commercial properties, raw land, and certain types of real estate notes. Because the IRS imposes strict rules on what is allowed and what constitutes a prohibited transaction, investors need a clear picture of the mechanics before committing capital.
More from this site
Keep reading the latest coverage
This article covers the property types that qualify, the account structures used, the rules investors must follow, the steps to acquire property inside an IRA, and the risks and tax considerations that come with it.
Types of Real Estate Allowed in IRAs
The IRS does not limit IRA investors to a narrow list of property types, but it does require that the investment serve a legitimate retirement purpose and avoid prohibited transactions. Common real estate categories held in self-directed IRAs include:
- Single-family rental homes
- Multi-family residential properties
- Commercial office or retail space
- Raw or undeveloped land
- Condominiums and townhouses
- Mortgage loans secured by real estate (non-recourse)
- Real estate tax liens and deed investments
Flipping properties is generally permitted, but the IRS may treat frequent, short-term flipping as a business. If the IRS reclassifies the activity, the IRA could lose its tax-advantaged status or face unrelated business income tax on the gains. Investors should document their long-term strategy carefully.
Account Structures for Real Estate
Not every IRA can hold real estate. The account must be a self-directed IRA, meaning the custodian permits alternative assets beyond publicly traded securities. Common structures include:
| Structure | Key Feature | Consideration |
|---|---|---|
| Traditional Self-Directed IRA | Tax-deductible contributions; tax-deferred growth | Distributions taxed as ordinary income |
| Roth Self-Directed IRA | After-tax contributions; tax-free growth and withdrawals | Income limits and contribution caps apply |
| SEP IRA (Self-Directed) | Higher contribution limits for self-employed individuals | Subject to required minimum distributions |
| Solo 401(k) | Employee and employer contributions; no custodian required for some assets | Plan documents must explicitly allow real estate |
Using a self-directed custodian is essential. A standard brokerage IRA cannot hold physical property because the custodian does not facilitate real estate transactions or title transfers.
Rules and Prohibited Transactions
The IRS strictly defines what constitutes a prohibited transaction when real estate sits inside an IRA. Engaging in any of these actions can result in the entire IRA being treated as distributed, triggering taxes and penalties.
Key rules include:
- The IRA owner or a disqualified person cannot personally use, live in, or rent the property.
- The IRA owner cannot provide personal services to the property or its tenants.
- Disqualified persons include the account owner, spouse, ancestors, lineal descendants, and entities they control.
- All income from the property must flow back into the IRA.
- Expenses must be paid from IRA funds, not personal funds.
How to Purchase Real Estate in an IRA
The process differs from a standard home purchase. The steps typically include:
Every document, from the purchase contract to the deed, must reference the IRA as the buyer. Title companies and closing attorneys familiar with self-directed IRAs can help avoid costly mistakes.
Risks and Considerations
Real estate in an IRA carries risks beyond those of a traditional investment. Liquidity is limited because selling property can take weeks or months, and required minimum distributions cannot be satisfied with physical property without selling it first. There are also UBIT (unrelated business income tax) concerns if the IRA uses leverage or runs a business within the property. Maintenance costs, vacancy, and management fees reduce returns inside a tax-advantaged wrapper, so investors should model net yields carefully before committing funds.