Using a Self-Directed IRA to Invest in Real Estate

A self-directed IRA is an individual retirement account whose custodian allows investments beyond stocks, bonds and funds, including real estate. The IRA, not the account holder, buys and owns the property, pays its costs and collects its income, and the tax advantages of the IRA apply to the result.

This is a U.S.-only tool, for American investors with retirement savings who are thinking of putting some of them into property. The rules are strict and the penalty for breaking them is severe, so this article concentrates on what you cannot do. Canadian readers will find the position for RRSPs and TFSAs at the end: they cannot own property directly at all.

What the tax code allows

The Internal Revenue Code does not forbid IRAs from owning real estate. What it forbids is narrower: IRAs cannot invest in collectibles, such as art, antiques, gems, coins or alcoholic beverages (with limited exceptions for certain precious metals), or in life insurance.[1] To hold property, the IRA needs a custodian that will accept real estate as an asset.

How an IRA real estate purchase works

1. Open or transfer to a self-directed IRA

   Choose a custodian that will hold real estate, and move funds by a direct transfer or rollover.

2. The IRA buys the property

   Title is in the name of the IRA (through its custodian), and the purchase money comes from the IRA.

3. The IRA pays every expense

   Taxes, insurance, repairs and management are paid from IRA funds, not from your own pocket.

4. Income goes back to the IRA

   Rent and sale proceeds are paid into the IRA, not to you.

5. You deal with it only at arm’s length

   Neither you nor your family may use, sell to, buy from, lend to or work for the property (see below).

Prohibited transactions: the rule that matters most

The IRS defines a prohibited transaction as any improper use of the IRA by you, your beneficiary or any disqualified person. Disqualified persons include your fiduciary and members of your family: your spouse, ancestors, lineal descendants and any spouse of a lineal descendant.[2] Prohibited transactions generally include:[1]

• the sale, exchange or lease of property between the IRA and a disqualified person;
• lending money or extending credit between the IRA and a disqualified person;
• furnishing goods, services or facilities between the IRA and a disqualified person;
• any transfer of IRA income or assets to, or use of them for the benefit of, a disqualified person.

The IRS gives examples that apply directly to property: borrowing money from the IRA, selling property to it, using it as security for a loan, and buying property for personal use, now or in the future, with IRA funds. It also warns that the risk of a prohibited transaction is higher when the IRA holds non-publicly traded assets or assets you directly control.[2]

Examples, applied to a rental property

Generally allowed

• The IRA buys a rental building from an unrelated seller.
• The IRA rents units to unrelated tenants at market rent.
• The IRA pays an unrelated property manager from IRA funds.
• The IRA sells the property to an unrelated buyer.

Prohibited

• Buying a property your parents or children own.
• Staying in the property, or letting your family use it.
• Lending your own money to the IRA, or using the IRA as security for your loan.
• Paying the IRA’s repair bills yourself, or selling the property to yourself.

The consequence is severe. If you or your beneficiary engage in a prohibited transaction during the year, the account generally stops being an IRA as of the first day of that year and is treated as having distributed all its assets to you at fair market value on that date.[2] That can mean income tax on the whole account, and possibly an early-distribution tax, in one year.

Unrelated business income tax (UBIT)

IRAs, including traditional and Roth IRAs, are subject to the tax on unrelated business income.[3] For real estate, three points matter:

• Ordinary rent is usually excluded. Rents from real property are excluded from unrelated business taxable income.[3]
• Hotels are different. Payment for occupying space when personal services are also provided is not rent from real property, so the exclusion does not apply to renting hotel rooms or similar.[3] An IRA that owns and operates a hotel is running a business.
• Borrowed money creates taxable income. The rent exclusion does not apply to income from debt-financed property.[3] If the IRA uses a mortgage to buy, part of the income and gain becomes taxable.

A return on Form 990-T is required if gross income from unrelated businesses is $1,000 or more.[3]

Is it worth it?

An IRA can let rental income and gains grow inside a tax-advantaged account. The trade-offs are that the money is locked up until retirement age, property is illiquid and concentrated, every expense must come from IRA cash, and custodial fees and the administration of the rules add cost. It works best for investors with a large IRA, cash inside it for reserves, and a property they have no personal connection to.

The Canadian position: RRSPs and TFSAs

Canada has no equivalent of a real-estate-owning self-directed IRA. Registered plans such as RRSPs, RRIFs and TFSAs may hold only “qualified investments,” which are listed in section 4900 of the Income Tax Regulations. The list does not include land or buildings held directly. It does include a debt obligation fully secured by a mortgage on real property in Canada, provided the borrower is not a “connected person” under the plan (broadly, the plan holder and people or companies closely connected to them), and mortgages administered by an approved lender and insured under the National Housing Act or by an approved private insurer.[4]

In practice, a Canadian can use a self-directed RRSP or TFSA to hold an arm’s-length mortgage, or units of a mutual fund trust or shares of a public corporation that owns property, but not to buy a building. For other ways to fund an investment property, see our overview of financing hard-to-finance property.

This article is general information, not tax or legal advice.

Sources

1. Retirement plan investments FAQs — Internal Revenue Service. Checked 2026-10-12.
2. Publication 590-A (2025), Contributions to Individual Retirement Arrangements (IRAs): Prohibited Transactions — Internal Revenue Service. Checked 2026-10-12.
3. Publication 598 (03/2021), Tax on Unrelated Business Income of Exempt Organizations — Internal Revenue Service, March 2021. Checked 2026-10-12.
4. Income Tax Regulations (C.R.C., c. 945), section 4900: Qualified investments — Justice Laws Website, Government of Canada. Checked 2026-10-12.