Can You Buy Real Estate With a Roth IRA? Rules, Loans, and UDFI Tax

Buying real estate with a Roth IRA is legal, but only through a self-directed Roth IRA held by an IRS-approved custodian that can take title to the property on the account’s behalf. Rent and eventual sale proceeds grow tax-free inside the account, which is the whole appeal. The catch is a tight set of rules: you can’t live in the property, your close family can’t rent it, you can’t work on it yourself, and every dollar of income and expense has to move through the IRA. Break those rules and the IRS can treat the entire account as distributed to you in a single tax year.

Can You Fund the Account in the First Place

Roth IRA eligibility comes first. For 2026, single filers with modified adjusted gross income above $168,000 can’t contribute at all, and the phase-out starts at $153,000. For married couples filing jointly, the phase-out runs from $242,000 to $252,000.¹ A backdoor Roth conversion may be available above those thresholds, with its own tax consequences.

Annual contributions are small relative to a property purchase: $7,500 in 2026 if you’re under 50, or $8,600 at 50 and older.¹ Almost everyone who pursues this strategy funds the account through a rollover or transfer from another retirement plan: a traditional IRA, an old employer’s 401(k), or another Roth. A direct custodian-to-custodian rollover has no dollar cap and avoids withholding. Indirect 60-day rollovers are limited to one per twelve-month period, and missing the window converts the whole balance into a taxable distribution.

The Self-Directed Roth IRA Structure

A regular Roth IRA at a discount brokerage will hold stocks, bonds, and funds, and that’s it. To hold a property deed, you need a self-directed IRA (SDIRA) opened with a custodian or trustee approved under 26 U.S.C. § 408(a), which requires a bank or another entity that has demonstrated to the IRS that it can properly administer the account.² The custodian holds title on the IRA’s behalf, processes paperwork, and files the annual reports the IRS requires.

The custodian is not your advisor. They do not vet whether a property is a smart buy. If you direct them to purchase a house that needs a new foundation, they’ll execute the transaction. Inspections, appraisals, and market analysis are entirely your responsibility.

SDIRA custodians cost more than a retail brokerage. Some charge a flat annual fee, roughly $275 to $500. Others scale fees to assets under custody, running from about $150 a quarter on smaller accounts to $2,500 or more per year on larger portfolios. Expect setup fees and per-transaction charges too. Every dollar comes out of the IRA.

There’s also an annual valuation obligation most first-time investors don’t anticipate. Each December 31, the property needs a fair market value, and the custodian uses that figure to file Form 5498 with the IRS, typically by March 1. For real estate, that usually means a professional appraisal. Residential appraisals generally run $600 to $800, and multi-unit or commercial buildings cost more. This is a recurring IRA expense that has no equivalent in a securities account.

Prohibited Transactions: The Rules That Can Destroy the Account

The single biggest risk in this strategy is a prohibited transaction. Under 26 U.S.C. § 4975, the IRA cannot transact with, or benefit, any “disqualified person.”³

Disqualified persons include you (as the person directing the account, you’re treated as a fiduciary), your spouse, your ancestors, your lineal descendants, the spouses of those descendants, and any entity in which those people together hold 50% or more of the voting stock, capital, or beneficial interest.³ Siblings, aunts, uncles, and cousins are not on the list.

The IRA can’t buy from, sell to, or lease to a disqualified person. You can’t spend a night in the property, use it as an office, or store personal belongings there. You can’t pledge it as collateral for a personal loan or borrow money from the account.⁴

Your own labor counts. If the faucet leaks, you can’t fix it. Painting, landscaping, replacing a water heater, mowing the lawn — all off-limits. Personal effort on the property is treated as a service to the IRA that benefits you, which is self-dealing. Everything gets contracted out and paid for from IRA funds.

What Happens if You Break the Rules

For IRAs, a prohibited transaction is not a fine. Under § 408(e)(2), the account ceases to be an IRA as of January 1 of the year the transaction occurred, and the whole balance is treated as distributed to you on that date.² In a Roth, the earnings portion becomes taxable income, and if you’re under 59½ the 10% early distribution penalty applies to those earnings.⁵ On an appreciated property, that can be a six-figure tax hit in one year. The § 4975 excise taxes still apply to other disqualified persons who participated, but the IRA owner is exempt from those excise taxes when the account itself is disqualified; account destruction is the punishment.³

How the Purchase Actually Works

The IRA is the buyer on every document. Contracts, the deed, and the title policy all read something like “Custodian Name FBO Your Name IRA Account #12345.” FBO stands for “for the benefit of,” and it signals that the custodian holds the property inside the retirement account. A mistake on any document can create title problems that are expensive to untangle later.

You start the process by submitting a Direction of Investment form to your custodian, identifying the property, seller, purchase price, and source of funds within the IRA. The custodian reviews the package, which takes a few business days and longer for complex deals. Earnest money moves directly from the IRA to the escrow agent. Routing it through your personal checking account, even for an hour, creates a commingling problem that can jeopardize the account’s tax status.

At closing, the custodian signs the deed and closing documents on the IRA’s behalf. You review for accuracy but are not a party in your individual capacity. Funds wire from the IRA to the title or escrow company. Once the deed is recorded, it names the IRA, and the title policy lists the IRA as the insured.

Running the Property Day to Day

After closing, a wall stands between your money and the IRA’s money. Rent goes to the custodian, not to you. Property taxes, insurance, HOA dues, and repairs are paid from IRA funds. If the roof needs replacing and the IRA is short on cash, you can’t write a personal check to cover it. That would be either an excess contribution or a prohibited transaction, and given the $7,500 to $8,600 contribution ceiling, almost certainly both.¹

Most investors bring in a property management company. The manager collects rent, forwards it to the custodian, and submits invoices to be paid from IRA funds. Residential management typically costs 8% to 12% of monthly rent. Add custodian fees, annual appraisals, and the fact that you can’t deduct property expenses on your personal return (the IRA owns the property, not you), and the real net return often looks different from the yield on a rental spreadsheet.

Liquidity is the trap. A new roof, a failed HVAC system, or a long vacancy can drain cash quickly, and you can’t inject personal funds to save the property. If the IRA runs dry, you’re headed toward a forced sale. Keep a meaningful cash reserve inside the IRA alongside the property rather than emptying the account into the purchase price.

Financing With a Non-Recourse Loan

If the IRA doesn’t have enough cash to buy outright, it can borrow, but only through a non-recourse loan. The lender’s sole remedy on default is the property itself; they cannot go after you personally or after other assets in the IRA. A conventional mortgage with a personal guarantee is a prohibited transaction because the guarantee is a benefit flowing between you and the IRA.³

Non-recourse loans for IRAs are a niche product. Fewer lenders offer them, rates run higher than conventional mortgages, and loan-to-value ratios usually cap at 50% to 65%. The down payment, closing costs, and every loan payment come from IRA funds.

The UDFI Tax Most Investors Miss

Leverage inside a Roth IRA triggers a tax bill people rarely anticipate. Under 26 U.S.C. § 514, the portion of rental income or sale gain attributable to borrowed money is treated as unrelated debt-financed income (UDFI), which rolls into unrelated business taxable income.⁶ Even though a Roth IRA is otherwise tax-exempt, § 408(e)(1) subjects IRAs to the unrelated business income tax under § 511.²

The taxable share is roughly the ratio of average acquisition indebtedness to the property’s average adjusted basis. If the IRA borrowed 60% of the price and hasn’t paid the loan down much, roughly 60% of the net rental income or capital gain can be exposed to tax. When gross UBIT across the IRA reaches $1,000 or more, the custodian must file Form 990-T, and the IRA owes tax at trust rates, paid from IRA funds.⁷ The UDFI percentage drops as the loan is paid down, and once the mortgage is gone the issue disappears. A self-directed solo 401(k), if you’re self-employed, is exempt from UDFI on leveraged real estate under § 514(c)(9) and can produce a better after-tax result for this specific strategy.

Selling and Getting the Money Out

When the IRA sells, the proceeds flow back into the IRA, not to you. The custodian handles the closing on the sale side just as they did on the purchase, and the cash sits inside the Roth tax-free until you reinvest it or hold it.

Pulling the money out of the Roth and into your personal accounts tax-free requires a qualified distribution. Two conditions must both be met: your first Roth contribution to any Roth IRA was made at least five tax years ago, and you are 59½ or older.⁵ When both are satisfied, the entire distribution, including every dollar of appreciation on the property, comes out free of income tax and penalties.

If you need to pull money out earlier, Roth ordering rules help: your original contributions come out first, always tax-free and penalty-free, and only after those are exhausted do you reach earnings, which would then be taxable and, if you’re under 59½, subject to the 10% early withdrawal penalty.⁵ Roth IRAs also have no required minimum distributions during the owner’s lifetime, so the property or its sale proceeds can sit in the account indefinitely.

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
2
Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts
3
Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions
4
Internal Revenue Service. Retirement Topics – Prohibited Transactions
5
Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements
6
Office of the Law Revision Counsel. 26 U.S. Code 514 – Unrelated Debt-Financed Income
7
Internal Revenue Service. Instructions for Form 990-T (2025)