Income belongs to the IRA

Every dollar an IRA-owned asset produces belongs to the IRA. Rent checks are made payable to the IRA. Note payments are remitted to the IRA. Sale proceeds return to the IRA. Nothing is routed to your personal account.

Receiving that income personally, even temporarily and even by accident, is a prohibited transaction. Instruct tenants, property managers, borrowers, and fund sponsors to remit directly to the IRA from the beginning.

The tax treatment

In a Traditional IRA, income and gains accumulate tax-deferred. Nothing is taxed while it stays in the account. Distributions in retirement are taxed as ordinary income.

In a Roth IRA, income and gains accumulate tax-free, and qualified distributions are free of federal income tax. A distribution is qualified once the account has satisfied the five-year rule and you are at least 59½, or you meet another qualifying exception.

Compounding without an annual tax drag is the structural advantage. A rental generating income inside an IRA is not producing a yearly tax bill.

Annual valuation is required

Alternative assets do not have a closing price, so the IRS requires an annual fair market value report for each holding on Form 5498. Depending on the asset, acceptable documentation may include a licensed appraisal, a broker price opinion, a sponsor-issued statement, a current note balance and payment history, or a dated market price for metals and digital assets.

This is your responsibility to supply, on the administrator's schedule. Valuation also drives required minimum distribution calculations for Traditional IRAs and any Roth conversion amount.

When taxes can apply inside the IRA

Two exceptions are worth knowing before you invest.

UBIT, or Unrelated Business Income Tax, applies when an IRA earns income from an active trade or business, often through an operating business held in a pass-through entity. Passive rent, interest, dividends, and capital gains are generally excluded.

UDFI, or Unrelated Debt-Financed Income tax, applies to the portion of income attributable to borrowed money. This most commonly arises when an IRA buys real estate with a non-recourse loan. The debt-financed percentage of income may be taxable to the IRA, which files Form 990-T and pays from IRA funds.

Neither is a reason to avoid an investment, but both change the math. Model them with your CPA in advance.

Taking money out

Distributions from a Traditional IRA are taxed as ordinary income and are generally penalty-free at 59½. Required minimum distributions begin at the applicable RMD age. Because alternative assets are illiquid, RMD planning matters. An IRA holding a single rental property and little cash can struggle to satisfy a distribution requirement. In-kind distributions of a fractional interest are possible but add valuation complexity.

Roth IRAs have no required minimum distributions during the original owner's lifetime, which is a meaningful advantage for illiquid holdings.

Selling and reinvesting

When the IRA sells an asset, proceeds return to the IRA and can be redeployed with no tax event. No capital gains are recognized, there are no wash sale concerns, and there is no annual reporting of the gain. You submit a sell direction to the administrator, funds settle into the account, and the cycle begins again at Step 5.

Distribution timing, RMD strategy, and the tax treatment of any specific holding depend on your individual circumstances. Discuss them with your own financial advisor or CPA.

Frequently Asked Questions

Can I collect rent personally from a property my IRA owns?

No. All rent belongs to the IRA and must be paid directly to the IRA. Receiving it personally, even temporarily, is a prohibited transaction. Direct tenants or your property manager to remit to the IRA from the start of the lease.

Do I pay capital gains tax when my self-directed IRA sells an asset?

No. Gains inside an IRA are not subject to capital gains tax. Proceeds return to the account and can be reinvested. In a Traditional IRA, tax is deferred until distribution. In a Roth IRA, qualified distributions are federal income tax-free.

What is UBIT in a self-directed IRA?

Unrelated Business Income Tax applies when an IRA earns income from an active trade or business rather than passive investment. Passive rent, interest, dividends, and capital gains are generally exempt. When UBIT applies, the IRA files Form 990-T and pays the tax from IRA funds.

Does my IRA owe tax if it uses a mortgage to buy property?

Possibly. Unrelated Debt-Financed Income tax may apply to the share of income attributable to the borrowed portion. Any loan must also be non-recourse, with no personal guarantee from you. Model the UDFI impact with a CPA before borrowing.

Why does my self-directed IRA need an annual valuation?

The IRS requires the fair market value of every IRA asset to be reported annually on Form 5498. Alternative assets have no public market price, so you must supply supporting documentation each year, such as an appraisal, broker price opinion, sponsor statement, or current note balance.

How do required minimum distributions work if my IRA owns real estate?

The RMD is calculated on the account's total fair market value, and it must be satisfied whether or not the assets are liquid. Options include holding cash reserves, using income from the property, distributing a fractional interest in kind, or satisfying the RMD from another IRA. Plan ahead, because this is a common problem with illiquid holdings. Roth IRAs have no RMDs during the original owner's lifetime.

Can my IRA sell one property and buy another?

Yes. Proceeds return to the IRA and can be redeployed into a new investment with no current tax consequence. Submit a sell direction to your administrator, then a new buy direction for the replacement asset.

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