Most IRA custodians offer only publicly traded securities. A self-directed custodian will hold real estate, notes and other alternatives instead. The appeal is obvious — rental income and gains growing tax-deferred or tax-free. The constraints are severe and unusually unforgiving, and the single rule that matters most is that you cannot personally benefit from the asset in any way.
How the structure works
You open an account with a self-directed custodian and transfer or roll funds in. The IRA buys the property, not you. Title is held in the name of the IRA. Every dollar of rent goes back to the IRA; every expense — taxes, insurance, repairs, management — is paid from the IRA. Your name does not appear on the deed, the lease, or the invoices.
Prohibited transactions and disqualified persons
This is where accounts get destroyed. You, your spouse, your ascendants and descendants and their spouses, and entities you control are disqualified persons. They cannot use the property, rent it, stay in it, buy it from the IRA, sell to the IRA, or provide services to it. You cannot fix the toilet yourself. Repairs must be paid for by the IRA and performed by unrelated parties. A prohibited transaction can disqualify the entire account as of the first day of the year, making the whole balance a taxable distribution.
Financing inside an IRA: non-recourse only
If the IRA borrows, the loan must be non-recourse — secured only by the property, with no personal guarantee, because guaranteeing IRA debt is itself a prohibited transaction. Non-recourse lenders for IRAs are a specialist niche. Expect larger down payments, commonly 30–40%, and terms less favourable than ordinary investor financing. A standard DSCR loan will not work here because it requires a guarantee.
UDFI: the tax nobody expects in a tax-free account
When an IRA uses debt to acquire property, the income attributable to the debt-financed portion can be subject to unrelated debt-financed income tax — taxable inside the IRA, which is a genuinely counterintuitive outcome. Solo 401(k) plans have a different treatment for real property acquisition indebtedness, which is one reason investors with self-employment income sometimes prefer that vehicle. This is fact-specific and belongs with a CPA before you buy, not after.
What you give up
No depreciation benefit — the account is already tax-advantaged, so the deduction has nowhere to go. No 1031 exchange, for the same reason. No personal use, ever. Custodian fees on every transaction. Liquidity problems when the IRA must fund a large repair and holds no cash. And distributions eventually come out as ordinary income from a traditional IRA, not at capital gains rates. Many investors conclude that holding rentals outside the IRA, in an LLC with ordinary financing, produces a better after-tax result.
Self-Directed IRA (Real Estate) FAQ
No. Any personal use by you or a disqualified person is a prohibited transaction and can disqualify the entire account.
No. Providing services to the IRA’s asset is a prohibited transaction. Work must be paid for by the IRA and done by unrelated parties.
Only a non-recourse loan with no personal guarantee. These come from specialist lenders and typically require 30–40% down.
No. The account is already tax-advantaged, so the deduction provides no benefit.
The account can be treated as distributed in full as of the first day of that year, with the resulting tax and potential penalties. The consequences are severe enough to warrant professional guidance up front.
For those eligible, often yes — particularly because of how acquisition indebtedness is treated and because checkbook control is simpler. Eligibility requires self-employment income with no full-time employees.