Buying property inside a retirement account is possible with a self-directed IRA, but the deal has to be built around the account’s ownership, cash flow routing, and the prohibited transaction rules. This guide walks through real estate IRA rules, how to buy real estate with IRA funds step by step, and the practical details that keep a purchase compliant and workable over time.

Self-directed IRA Real Estate Basics

A self-directed IRA is an IRA administered by a custodian, with expanded access to alternative assets like real estate, private placements, and notes. Unlike a standard brokerage IRA built for public securities, a self-directed structure is designed to hold and administer private assets that require signatures, document review, and custom reporting.

A helpful mental model: the IRA is the buyer, the IRA is the owner, and the IRA is the bank account that pays the bills and receives income. Once that separation is respected in writing and in cash movement, using an IRA to buy investment property becomes far easier to manage.

Can You Use an IRA to Buy Rental Property?

An IRA can buy rental property as an investment, and the investment must be operated strictly for the IRA’s benefit. A self-directed IRA real estate custodian administers the account, processes payments, and holds the asset under the IRA structure.

The “rental property” part is straightforward. The “who benefits” part is where mistakes happen. A prohibited transaction can occur if IRA assets are used by or for the benefit of a disqualified person, or if the IRA owner or fiduciary deals with plan assets for their own interest. Personal use is specifically called out as an example of a prohibited IRA transaction, including buying property for personal use with IRA funds.

Real Estate IRA Rules: The Non-negotiables

Real estate IRA rules are not a long list, but they are strict. The rules show up in ownership structure, money movement, and who can touch the deal.

Rule 1: Keep the IRA Separate from You

A prohibited transaction in an IRA can be “any improper use” of the IRA by the owner, the beneficiary, or any disqualified person. Disqualified persons include the IRA owner’s fiduciary and family members such as a spouse, ancestors, lineal descendants, and spouses of lineal descendants.

Rule 2: Avoid Self-dealing and Personal Benefit

Prohibited transactions include a fiduciary dealing with plan income or assets in their own interest and a transfer or use of plan assets by or for the benefit of a disqualified person. In real estate terms, that can look like free labor, discounted materials through your own business, or “temporary” personal use that feels harmless until it triggers account consequences.

Rule 3: Respect the Penalty Risk

If the IRA owner or beneficiaries engage in a prohibited transaction during the year, the account stops being an IRA as of the first day of that year, and it is treated as distributing all assets at fair market value on that first day. That outcome can turn a long-term retirement plan into immediate taxable income, plus penalties depending on age and facts.

How to Buy Real Estate with IRA Funds (Step-by-step)

This is the operational playbook for using a self-directed IRA to buy investment property in a way that survives underwriting, escrow, and future audits.

Step 1: Pick the right account type

Start by matching the IRA type to your tax goal.

Traditional SDIRA: tax-deferred growth and taxable distributions later (common for rollovers from pre-tax plans).
Roth SDIRA: after-tax contributions and qualified tax-free distributions later, subject to Roth rules.

The real estate purchase workflow is similar for both. The difference is how contributions, conversions, and distributions play out over time.

Step 2: Choose a self-directed IRA real estate custodian

Your custodian’s workflow becomes your workflow. Some custodians move quickly and have clear checklists. Others require longer lead times for document review, wiring, and signatures.

Look for these practical capabilities:

Real estate purchase processing and escrow coordination.
Clear titling format and document requirements.
Bill pay support for recurring property expenses.
A predictable fee schedule for transactions and asset administration.

Step 3: Fund the SDIRA

Funding is commonly done through:

Rollover from an employer plan into a self-directed IRA.
Transfer from another IRA.
Annual contributions, if the purchase is small enough or you are building reserves.

Build in reserves. Real estate inside an IRA is not forgiving when the roof leaks and the IRA is short on cash. A personal “bridge payment” is where prohibited transaction risk shows up.

Step 4: Find the property and run IRA-focused underwriting

Evaluate the property like a normal investor, plus add IRA-specific underwriting:

Can the property be operated without personal involvement that looks like services?
Can all payments be routed through the IRA cleanly?
Is there enough cash in the IRA for closing costs, repairs, insurance, and vacancies?

If a property only works if you do the rehab yourself, it is a bad match for an IRA purchase in many cases. The IRA cannot be used for your benefit, and furnishing services between a plan and a disqualified person is one of the prohibited transaction categories.

Step 5: Write the offer correctly

Your purchase contract needs the buyer line to reflect the IRA, usually through the custodian “FBO” you. Many custodians publish a sample format such as: “Custodian Name, Custodian FBO [Accountholder Name] IRA [Account #].”

This step drives title vesting and who has legal authority at closing.

Step 6: Submit documents to the custodian and close

You direct the custodian to execute documents and send funds, and the custodian signs on behalf of the IRA account per its process. Expect a document checklist, including purchase contract, settlement statement, title documents, and insurance details.

Plan timing. If the seller wants a 10-day close, but your custodian requires 7–10 business days for review and wiring, the deal may die on logistics, not math.

Step 7: Manage the property with IRA-safe operations

Once the IRA owns the property, the operating rules are simple:

Income goes into the IRA.
Expenses are paid from the IRA.
The IRA owner does not “use” the property, and disqualified persons do not use it either.

This is where professional property management often pays for itself. It keeps boundaries clear and reduces the chance of accidental personal benefit.

Step 8: Track valuations and records

Maintain:

Closing packet and title evidence.
Lease agreements and amendments.
Property manager statements.
Invoices and proof of payment.
Annual valuation support (appraisal, broker opinion, comps, or custodian-accepted method).

Good records are not just for neatness. They make future sales, audits, and distributions simpler.

Step 9: Sell, distribute, or reposition

On sale, the IRA is the seller and the proceeds go back into the IRA. That money can stay in the IRA for future deals or move out as distributions under IRA rules. The account’s type, your age, and your distribution plan shape how and when funds leave the IRA.

Direct Rollover vs Indirect Rollover vs Transfer

Many investors start a real estate IRA strategy with a rollover. The movement method affects risk.

Movement type	Common source	Key feature	Common pitfall
Direct rollover	401(k), 403(b), 457(b)	Funds go to IRA without being paid to you first	Delays if paperwork is incomplete
Indirect rollover	Employer plan distribution	Funds are paid to you first	Deadline and withholding problems
Trustee-to-trustee transfer	IRA to IRA	Institutions move funds directly	Fewer pitfalls, but needs correct account setup

IRA Prohibited Transactions Real Estate: Common Traps

Prohibited transactions sound abstract until they show up in everyday real estate actions. Here are the patterns that cause most problems.

Personal use, even briefly

Buying property for personal use (present or future) with IRA funds is listed as a prohibited transaction example. That includes “testing” the property, staying one night after a repair, or letting a family member use it while it is vacant.

Selling property to your IRA

Selling property to the IRA is another listed example of a prohibited transaction. So a common investor idea, “I’ll sell my rental to my IRA,” is usually a non-starter.

Borrowing from the IRA or using it as collateral

Borrowing money from the IRA and using it as security for a loan are also listed examples. In real estate terms, that can show up in creative financing proposals that tie your personal obligations to IRA assets.

Furnishing goods, services, or facilities

The prohibited transaction list includes furnishing goods, services, or facilities between a plan and a disqualified person. This is where hands-on rehab becomes dangerous. If you are the contractor, the property manager, or the repair crew, the line between “helping my investment” and “providing services” can become a problem fast.

Why the stakes are high

If the IRA owner or beneficiaries engage in a prohibited transaction, the account stops being an IRA as of the first day of that year and is treated as distributing all assets at fair market value. That is why IRA beneficiary protection strategies often include strict processes and professional administration, even for sophisticated families.

Financing Inside an IRA: Non-recourse Loans and UBIT

Some investors want leverage because it can boost purchasing power. In an IRA, financing is typically non-recourse, meaning the lender’s remedy is limited to the property and the IRA owner is not personally liable. With a non-recourse loan, rental income and expenses still flow through the IRA, and the loan is repaid from IRA activity tied to the property.

UBIT and UDFI

When an IRA uses debt to buy real estate, the debt-financed portion of the income can be treated as unrelated debt-financed income (UDFI), which can trigger unrelated business income tax (UBIT). Some custodians explain it as a percentage concept: if half the property is financed, then a portion of profits tied to that financed portion can fall into UDFI treatment.

When leverage makes sense

Leverage may fit when:

The property has strong, stable cash flow that can support payments and reserves.
You have modeled the tax friction from UBIT and filing requirements.
The IRA’s liquidity plan is strong.

Leverage is usually a poor fit when:

The deal needs heavy rehab, variable expenses, or frequent cash infusions.
The IRA is thin on reserves.
You are trying to “move fast” and cut corners on documentation.

Checkbook IRA and IRA LLC: Faster Payments, Same Rules

A checkbook IRA is commonly described as an IRA-owned LLC where you act as LLC manager and gain check-writing authority for investments. The idea is speed. Instead of asking the custodian to write every check, the LLC’s bank account is used for earnest money, repairs, and routine bills.

This structure can reduce transaction friction, but it does not remove prohibited transaction rules. The IRA still cannot be used for your benefit, and dealings with disqualified persons still create problems. Many investors treat the IRA LLC as a convenience tool, not a rules workaround.

Property Management, Repairs, and Expenses: Who Pays and Who Can Do the Work?

A clean SDIRA real estate operating system has three traits:

The IRA pays, not you.
The IRA receives, not you.
The work is done by third parties, not disqualified persons.

A practical way to avoid accidental violations:

Hire a property manager.
Use licensed vendors who invoice the IRA or IRA LLC.
Keep a dedicated folder with every invoice, approval, and payment confirmation.

If you personally swing the hammer, even “just to save money,” you drift toward the prohibited transaction category that involves furnishing services. That risk is not worth a few thousand dollars in labor savings.

Due Diligence Checklist for IRA Real Estate Purchases

Real estate can be forgiving when owned personally because you can patch mistakes with personal time and money. IRA real estate is less flexible, so diligence matters more.

Before closing:

Confirm correct buyer name and titling format with your custodian.
Confirm the property will be used strictly as an investment, with no personal use.
Verify insurance requirements and liability coverage.
Build a reserve budget for repairs, taxes, insurance, and vacancy months.
Review leases and tenant history.
Confirm property taxes, HOA rules, and rental restrictions.

After closing:

Set up rent collection directly to the IRA or IRA LLC.
Route all expenses through the IRA.
Keep annual valuation support.

Real Estate IRA Rules FAQ

Can you use IRA to buy rental property?

Yes, an IRA can own rental property as an investment, and personal use is treated as prohibited.

Can you live in the property later?

Buying property for personal use, present or future, is listed as a prohibited transaction example, so “buy now, live later” is a bad plan inside an IRA.

Can the IRA pay you for property management?

Payments for services by disqualified persons can fall into prohibited transaction territory, so professional third-party management is the cleaner path.

Can you use a mortgage?

IRAs often use non-recourse loans, and debt can create UBIT through UDFI concepts.

Selecting a Self-directed IRA Real Estate Custodian

Custodian choice changes the day-to-day experience more than most investors expect. A good self-directed IRA real estate custodian provides:

Clear turnaround times for purchases and wires.
Real estate document familiarity.
Straightforward billing and fee disclosure.
Support for ongoing administration and reporting.

When comparing custodians, ask:

How are purchase documents submitted and approved?
How long do wires typically take?
How are recurring bills handled?
What is the fee schedule for purchases, sales, wires, and annual asset administration?

A Realistic Example: Buy-and-Hold Rental Inside a Self-directed IRA

Imagine a traditional SDIRA buys a rental for $180,000 cash. Closing costs are $6,000 and initial reserves are $10,000, so total cash allocated is $196,000. Annual gross rent is $24,000. After property management, taxes, insurance, repairs, and vacancy, net cash flow is $10,200 per year.

Over 7 years, the IRA collects about $71,400 in net rent. If the property sells for $240,000 and selling costs total $14,000, the IRA nets $226,000 on sale. Total value back to the IRA is roughly $297,400 ($71,400 rent + $226,000 sale proceeds), not counting any cash reserves still held. This is the beauty of the structure when it is run cleanly: income and gains recycle inside the IRA instead of leaking out through personal accounts.

Common Reasons SDIRA Real Estate Deals Fail

The offer is written in a personal name instead of the IRA’s vesting format.
Earnest money is paid personally, then “reimbursed” later.
The investor underestimates repair costs and tries to pay a bill personally.
A family member stays in the unit during vacancy.
The investor takes on a deal that requires hands-on labor, which drifts into providing services.

Choose Nevada Trust Company for SDIRA Administration

Self-directed investing can be rewarding, but it runs best with a team mindset and structured administration. At Nevada Trust Company, we offer trust, custody, escrow, retirement, and investment management services, supported by experienced professionals and a client-first approach.

For investors holding private assets with ongoing paperwork and reporting needs, that service profile can fit well with a long-term real estate IRA strategy. Contact us today to learn more.