Buying a Rental with Your IRA: A Plain-English Guide
Yes—you can use a self-directed IRA (SDIRA) to own a rental property. The IRA is the buyer and owner, the rent flows back to the IRA, and all expenses are paid from the IRA. Here’s how it works, the rules you must follow, and a simple checklist to do it right.
The Big Idea (In One Minute)
- Use a self-directed IRA (Traditional or Roth) with a custodian that allows real estate.
- Title/vesting: the buyer on the contract and deed is your IRA, e.g. Custodian FBO [Your Name] [Traditional/Roth] IRA.
- All money stays inside the IRA: earnest money, closing costs, taxes, insurance, repairs, and management are paid by the IRA; all rent returns to the IRA.
- No personal use or “sweat equity.” You and other “disqualified persons” can’t use the property or work on it for compensation.
- If you finance: the loan must be non-recourse (no personal guarantee).
How a Purchase Actually Works
- Open/Fund a Self-Directed IRA. Rollover, transfer, or new contributions.
- Write the Offer in the IRA’s Name. Your custodian signs; you do not sign personally.
- Close with IRA Funds (and Non-Recourse Loan if used). Keep a post-close cash buffer in the IRA for repairs and vacancies.
- Operate at Arm’s Length. Use third-party vendors and (ideally) a property manager. All income/expenses run through the IRA.
- Annual Compliance. If applicable, your custodian/CPA files Form 990-T for the IRA (see tax notes below).
Strict “No-Touch” Rules (Prohibited Transactions)
- No personal stays, storage, or renting to family (spouse, parents, kids, their spouses).
- No loans to/from yourself; no personal guarantees; no personal funds for expenses.
- No DIY rehab for compensation or “sweat equity.” Use arm’s-length vendors.
Violations can disqualify the IRA and trigger taxes/penalties. When in doubt, ask your custodian and CPA before you act.
Financing & Taxes (Read This Twice)
Non-Recourse Loans Only
If you use a mortgage, it must be non-recourse: the property is the collateral and you do not personally guarantee the loan.
UBIT on Debt-Financed Income (UDFI)
When an IRA uses debt, the portion of the net income and gains attributable to the debt can be taxed to the IRA as UBIT. The IRA (not you) may need an EIN and to file Form 990-T. A CPA should compute this annually.
Short-Term Rentals
Average stays of 7 days or less (or ≤30 days with substantial services like cleaning during stays, breakfast, concierge) can be treated as business income and may trigger UBIT even without debt. Long-term rentals are simpler.
Quick Numbers Example (Illustrative Only)
- Purchase price: $400,000 (50% cash / 50% non-recourse loan)
- Net rental income after expenses: $12,000
- Average debt ratio: ~50% → about $6,000 may be subject to UBIT (CPA calculates precisely)
Do
- Keep a healthy cash buffer inside the IRA.
- Hire a property manager and independent vendors.
- Put insurance, utilities, and contracts in the IRA’s name.
- Maintain clean records for your custodian and CPA.
Don’t
- Don’t stay at the property—ever.
- Don’t rent to disqualified persons.
- Don’t personally guarantee loans.
- Don’t pay expenses out of pocket or mix funds.
When a Solo 401(k) Might Be Better
If you have eligible self-employment income, a Solo 401(k) can also buy rentals. A key advantage: leveraged real estate in a 401(k) is generally not subject to the debt-financing tax that applies to IRAs. Same arm’s-length rules apply; confirm details with your plan provider and CPA.
FAQs
Traditional vs. Roth?
Traditional IRAs are tax-deferred (taxes due when funds are distributed). Roth IRAs are funded with after-tax dollars; qualified withdrawals may be tax-free later. Strategy depends on your horizon and tax outlook.
What about RMDs?
Traditional IRAs require Required Minimum Distributions. Plan for liquidity: you can distribute cash or perform in-kind distributions of property interests.
Can I improve the property?
Yes—through the IRA, using third-party vendors. All invoices are paid by the IRA; you can’t do the work yourself for compensation.
Where can the IRA buy?
Most custodians allow properties anywhere in the U.S. Some allow international, but logistics and compliance become more complex.
Thinking About This Strategy?
If you want a quick assessment of whether an IRA purchase fits your goals—and how to structure it for North County San Diego neighborhoods—book a quick consult:
