Alternative asset
Real estate
Residential, commercial, or land held by the IRA itself — not by you personally.
What it is
A self-directed IRA can own real property directly, or through a wholly-IRA-owned LLC — rental homes, commercial buildings, raw land, or a share of a real-estate fund. The IRA is the owner; you direct the decisions.
Holding it in a self-directed IRA
Title is held in the IRA’s name (or that of an LLC the IRA owns). Every dollar of rent and sale proceeds flows into the IRA, and every expense — taxes, insurance, repairs, management — is paid from IRA cash. As a directed custodian, Institutional Trust Company holds title and processes what you direct; it does not evaluate or manage the property.
Requirements
- The IRA — not you — holds title to the property.
- All income flows into the IRA and all expenses are paid from IRA cash.
- The account keeps enough cash on hand to cover taxes, insurance, and repairs.
- Any financing must be non-recourse — you cannot personally guarantee the loan.
Limitations and prohibitions
- No personal use and no use by disqualified persons — you, your spouse, your ascendants and descendants and their spouses, and entities they control; you cannot live in, vacation in, or work on the property.
- “Sweat equity” is prohibited — repairs and management must be paid for from the IRA, not performed by you.
- A prohibited transaction under IRC § 4975 can disqualify the entire IRA, triggering tax and penalties.
- Debt-financed property generates unrelated debt-financed income (UDFI) under IRC § 514, taxable to the IRA on Form 990-T.
Valuation and liquidity
Real estate requires a periodic independent appraisal or broker price opinion for account valuation, and it is illiquid — selling can take months, so plan account cash accordingly.
Tax considerations
Because all carrying costs must come from the IRA, an account holding property needs a cash reserve; running short can force a distressed sale or, worse, a prohibited transaction.
A worked example
Your IRA buys a $200,000 rental all-cash from IRA funds. Rent of $1,500/month flows into the IRA; property tax, insurance, and repairs are paid from IRA cash. You may not stay there and can’t do the repairs yourself. Had the IRA instead borrowed $100,000 on a non-recourse loan, roughly half the net income would be unrelated debt-financed income (UDFI), taxable to the IRA on Form 990-T.
IRS forms & records
- Form 990-T — filed by the IRA to report and pay tax on UDFI or UBIT.
- Form 5498 — fair-market value, which requires a periodic independent appraisal.
- Form 1099-R — distributions, including any in-kind distribution of the property.
Common mistakes that can cost you
- Personal use, or doing your own repairs (“sweat equity”) — a prohibited transaction that can disqualify the whole IRA.
- Personally guaranteeing the mortgage — recourse debt to the owner is a prohibited transaction; financing must be non-recourse.
- Paying an expense out of pocket, or depositing rent personally — every dollar must run through the IRA.
- Running short of IRA cash to cover taxes, insurance, and repairs.
Before you invest
- The IRA (or a wholly-IRA-owned LLC) holds title.
- A cash reserve is funded for all carrying costs.
- Any financing is non-recourse.
- No disqualified person will use the property.
- An appraisal plan is in place for annual valuation.
Authorities
Educational only. This page is general information, not individualized investment, legal, or tax advice. Rules depend on your account type, transaction, tax year, and circumstances — consult a qualified professional.