Real Estate IRA Rules: What You Can and Can't Do
You've worked 30+ years to build your retirement savings. Using an IRA to buy rental property is completely legal—but the IRS has strict rules. Break them, and you could owe taxes and penalties on your entire IRA. Here's the straight talk on what's allowed and what's not.
Prohibited Transactions
Let me be direct: these are the rules that trip people up. Break any of these, and your entire IRA could be treated as a distribution—meaning you owe taxes on the full amount, plus penalties if you're under 59 1/2.
You CANNOT Do These Things
Live in or Use the Property
You cannot live in, vacation at, or personally use any property owned by your IRA—not even for one night.
Rent to Disqualified Persons
You cannot rent the property to yourself, your spouse, parents, children, grandchildren, or their spouses.
Provide Services (Sweat Equity)
You cannot do repairs, maintenance, or property management yourself. All work must be done by unrelated third parties.
Use Personal Funds for Expenses
All expenses (repairs, taxes, insurance, HOA fees) must be paid from the IRA, not your personal funds.
Personally Guarantee a Loan
If the IRA takes out a mortgage, you cannot personally guarantee it. Only non-recourse loans are allowed.
Buy Property from Disqualified Persons
Your IRA cannot purchase property that you, family members, or other disqualified persons currently own.
Sell Property to Disqualified Persons
You cannot sell an IRA-owned property to yourself or family members, even at fair market value.
Receive Indirect Benefits
Any arrangement that provides you or family members indirect benefits from the property is prohibited.
Who Are Disqualified Persons?
The IRS defines "disqualified persons" who cannot transact with your IRA. These include:
Note: Siblings, aunts, uncles, and cousins are NOT disqualified persons. Transactions with them are generally allowed (but consult a tax professional).
What You CAN Do
Permitted Activities
Understanding UBIT (Unrelated Business Income Tax)
UBIT is a tax that applies when your IRA earns income from debt-financed property or active business operations. This is one of the most misunderstood aspects of real estate IRAs.
When UBIT Applies
- •Leveraged Property: If your IRA uses a mortgage to buy property, the portion of income attributable to the borrowed funds is subject to UBIT.
- •Active Business: If the property operates as an active business (like a hotel you operate), income may be subject to UBIT.
When UBIT Does NOT Apply
- •All-Cash Purchases: If you buy property entirely with IRA funds (no mortgage), UBIT doesn't apply to rental income.
- •Passive Rentals: Standard rental income from a debt-free property is not subject to UBIT.
UBIT Rate: Trust tax rates apply, which can be quite high (up to 37% for income over ~$14,000). However, there's a $1,000 exemption, and many real estate investors find UBIT manageable compared to the tax benefits of the IRA structure.
Penalties for Breaking the Rules
IRA Disqualification
A prohibited transaction can disqualify your entire IRA. The full value becomes a taxable distribution, plus 10% early withdrawal penalty if under 59½.
Excise Tax
15% excise tax on the amount involved in the prohibited transaction. If not corrected, an additional 100% tax applies.
Loss of Tax Benefits
All the tax-deferred or tax-free growth you've accumulated becomes immediately taxable.
Cannot Be Reversed
Once a prohibited transaction occurs, you cannot undo it. The consequences are immediate and permanent.
Don't Risk 30 Years of Savings on a Compliance Mistake
You've worked too hard to lose your retirement over a technicality. A good self-directed IRA custodian knows these rules inside and out—and helps you stay on the right side of the IRS.