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If you have been building retirement savings and wondering whether there is a way to invest in real estate beyond traditional stocks and bonds, you are not alone. Many retirement savers eventually ask whether their IRA or other retirement account can be used to purchase rental property.
Under IRS rules, the answer is yes. Certain retirement accounts can hold real estate, including rental properties. However, this strategy comes with specific rules, responsibilities, and planning considerations that must be understood before moving forward.
This guide explains how real estate can be held inside a retirement account, which accounts may allow it, what the IRS rules require, and what investors should consider before getting started.
Most traditional IRAs and Roth IRAs held at banks or brokerage firms limit investment options to stocks, bonds, mutual funds, and similar securities. These limitations come from the financial institution, not from the IRS.
A Self-Directed IRA follows the same IRS rules as any other IRA, but it allows the account holder to direct investments into a broader range of assets. This may include real estate, mortgage notes, private placements, precious metals, and other alternatives that are permitted under IRS guidelines.
The IRS has allowed these types of investments since IRAs were created in 1974. The difference is that a Self-Directed IRA custodian administers the account rather than restricting it to a predefined investment platform.
Common types of self-directed retirement accounts include:
One reason investors explore real estate inside a Self-Directed IRA is the tax treatment of income and gains.
When a rental property is owned by an IRA:
For Roth IRAs, qualified distributions in retirement may be completely tax free under IRS rules.
Some investors also view real estate as a way to diversify retirement assets beyond publicly traded markets. Diversification alone does not remove risk, but it can reduce reliance on a single asset class.
While Self-Directed IRAs offer broader investment flexibility, they are governed by strict IRS rules. Failing to follow these rules can result in serious tax consequences.
The No Personal Benefit Rule
A Self-Directed IRA must operate as a completely separate entity from the account holder. This means:
Disqualified Persons
The IRS prohibits transactions between an IRA and certain individuals known as disqualified persons. These include:
The IRA cannot buy from, sell to, lease to, or otherwise transact with these individuals.
If a prohibited transaction occurs, the IRS may disqualify the entire IRA. This can result in:
Because of these risks, understanding and following the rules is essential.
Depending on the custodian and the structure used, a Self-Directed IRA may hold various real estate related assets, including:
All investments must be reviewed for compliance with IRS rules before purchase.
Step 1: Open a Self-Directed IRA
Not all custodians administer self-directed accounts. Investors must work with a custodian that specializes in Self-Directed IRAs and alternative assets.
Step 2: Fund the Account
A Self-Directed IRA can be funded through contributions, transfers from another IRA, rollovers from an eligible retirement plan, or conversions depending on the account type.
Step 3: Identify the Property
The account holder selects the property and performs due diligence. The custodian does not evaluate the investment, but processes transactions based on the account holder’s direction.
Step 4: Purchase Structure
Common structures include:
If debt is involved, Unrelated Debt-Financed Income may apply, and additional tax reporting may be required.
Step 5: Ongoing Management
The IRA owner cannot personally manage or maintain the property. Third-party property managers and contractors must be used. All income and expenses must flow through the IRA.
Liquidity
Real estate is illiquid. IRAs holding property should maintain sufficient cash to cover expenses such as taxes, insurance, repairs, and management fees.
Required Minimum Distributions
Traditional IRAs are subject to Required Minimum Distributions. If most of the IRA value is tied up in real estate, advance planning may be needed to meet distribution requirements.
Fees and Administration
Self-Directed IRAs typically involve administrative fees due to the complexity of alternative assets. These may include account fees, transaction fees, and asset holding fees depending on the custodian.
Using a retirement account to purchase rental property can be effective for some investors, but it is not suitable for all situations. This approach may appeal to those who understand real estate, are comfortable with long-term strategies, and can follow IRS rules precisely.
It may not be appropriate for those who need short-term liquidity, want personal use of the property, or are uncomfortable with the administrative responsibilities involved.
A Self-Directed IRA allows retirement savers to explore real estate as part of a long-term retirement strategy under existing IRS rules. Success depends on education, planning, proper structuring, and strict compliance with prohibited transaction rules.
Before proceeding, it is important to consult with qualified tax, legal, and financial professionals who understand self-directed retirement accounts and real estate.
At Mountain West IRA, we specialize in Self-Directed IRAs that allow investments beyond the stock market into alternative assets. Whether you are exploring a pre-tax or post-tax retirement account, our team can help you understand how the process works.
📞 Call us at 866-377-3311 or
This post is for informational purposes only and should not be considered financial advice. Please consult with a financial advisor for personalized advice.
Mountain West IRA, Inc. does not render tax, legal, accounting, investment, or other professional advice. If accounting, tax, legal, investment, or other similar expert assistance is required, the services of a competent professional should be sought.
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