How to Buy Real Estate With a Roth IRA

Many investors look for ways to diversify their retirement savings beyond traditional market holdings. Real estate often rises to the top of that list. The idea of owning property inside a Roth IRA can feel surprising at first, yet it is fully allowed when the account is set up as a self-directed IRA.

A self-directed Roth IRA expands your investment options to include certain alternative assets. Real estate is one of the most common choices. Investors use self-directed IRAs (SDIRAs) to buy single-family rentals, multi-unit buildings, commercial spaces, or even raw land. The potential for long-term growth inside a tax-advantaged account is a major draw.

The opportunity also comes with strict IRS rules. Personal use is prohibited. Any interaction with disqualified persons can trigger serious consequences. These limitations shape how the property is purchased, managed, and maintained.

In the next sections below, we’ll discuss the rules, processes, and considerations so you can see how the strategy works at a practical level.

How Does a Self-Directed IRA Work?

A self-directed IRA (SDIRA) follows the same statutory rules that apply to every IRA. Contribution limits, eligibility rules, and withdrawal requirements do not change. The core difference is the type of investments a custodian allows. An SDIRA expands the menu beyond market-based assets and gives investors access to certain alternative asset classes.

A standard IRA usually limits your investment options to mutual funds, ETFs, stocks, and bonds. A self-directed account widens the scope to include alternatives such as real estate, private equity, and cryptocurrency. Certain precious-metal bullion and coins may also qualify if they meet the standards defined in Section 408(m). NFTs treated as collectibles are not allowed.

Not all custodians offer the same set of assets. Many focus on a specific niche such as real estate. Comparing custodians matters because the account’s flexibility depends on what the provider permits.

Traditional or Roth

Depending on your retirement goals, you can choose to open a self-directed Traditional IRA or a self-directed Roth IRA.

A self-directed Traditional IRA can accept pre-tax and after-tax contributions. Pre-tax contributions are deductible when eligible. Withdrawals in retirement are generally taxable.

A self-directed Roth IRA is funded with after-tax dollars. Qualified withdrawals are tax-free, which is one reason many investors consider the Roth structure when holding assets with long growth horizons.

Here are points investors typically review when weighing the two structures:

✅ Traditional IRAs may offer upfront tax deductions.

✅ Roth IRAs may offer tax-free qualified withdrawals in retirement.

✅ Returns on alternative assets are uncertain, and these investments can introduce additional risks.

✅ Debt-financed investments can create exposure to unrelated business taxable income (UBIT or UBTI), even inside a Roth IRA.

✅ Qualified Roth withdrawals remain tax-free regardless of whether the original contribution was deductible, but UBIT may still have applied to the IRA during the investment period if leverage was used.

✏️ Hypothetical Example:

If an IRA invests $100,000 and the investment grows to $1.1 million, a qualified Roth withdrawal would generally be tax-free. If the IRA used debt to finance the purchase, the IRA may have owed UBIT on the income or gain tied to the financed portion.

📝 Note: UBIT does not apply to every SDIRA investment. It depends on the asset, structure, and use of leverage. Investors often speak with a tax professional to understand how UBIT may apply to their situation.

How to Buy Real Estate With a Self-Directed IRA

Buying real estate inside a self-directed IRA involves more steps than purchasing stocks or mutual funds through a traditional IRA. 

Work With a Qualified SDIRA Custodian

Every IRA must be held by a custodian that meets IRS requirements. With a standard IRA, this is usually a bank or brokerage. But when you’re buying real estate, you need a self-directed IRA custodian that allows investments in physical property.

The custodian plays a key role in:

✅ Facilitating purchases on behalf of the IRA
✅ Maintaining the account’s records
✅ Handling IRS reporting
✅ Executing instructions from the account holder (you)

In a typical SDIRA setup, you identify the property, direct the custodian to purchase it, and the custodian completes the transaction under the IRA’s name. While you control the investment decisions, you do not have direct access to the IRA’s funds or accounts.

📝 Note: The IRA (not you personally) owns the real estate. All income, expenses, and documents must flow through the IRA.

Transaction Delays Can Be a Challenge

Because your custodian executes all transactions on your behalf, even small payments require formal requests. If a rental property needs an urgent repair, for example, you cannot pay a contractor yourself. Instead, you must submit documentation to the custodian and wait for them to release the funds.

This setup works well for passive investments with minimal maintenance. But real estate often involves frequent, time-sensitive decisions. Delays can add up and create friction, especially with short payment windows for contractors, taxes, or property emergencies.

Using an IRA-Owned LLC for Signing Authority

To streamline the process, some investors use a structure where the SDIRA invests in an IRA-owned LLC. The LLC opens a dedicated bank account, and a manager — typically the IRA owner — can sign checks or initiate payments directly.

This approach provides more flexibility for active real estate management, but it does not remove IRS oversight. The LLC manager must:

Payments made from the LLC account must strictly relate to the IRA-owned property. You cannot mix personal and investment funds, nor can you provide services to the property.

📝 Note: Signing authority over an LLC account is not the same as personal control of IRA funds. You’re acting in a fiduciary role for the IRA. Missteps like using funds for personal benefit can trigger prohibited transaction penalties.

📌 The Carry Solo 401k is a self-directed Solo 401k plan that allows direct account control. Learn more about it here.

Risks of Buying Real Estate With a Roth IRA

Investing in real estate through a Roth IRA offers tax advantages, but it also brings higher complexity. These assets require careful planning, strict compliance with IRS rules, and a large cash outlay. Violations (even accidental ones) can result in disqualification of the IRA and steep tax penalties.

Real estate inside a Roth IRA is illiquid, high-maintenance, and subject to strict transaction limits. Before moving forward, it’s important to weigh these risks against the potential rewards.

Prohibited Transactions and Disqualified Persons

When your Roth IRA buys property, the account — not you personally — is the legal owner. You cannot live in, rent, manage, or directly benefit from the investment. You also cannot involve disqualified persons in any way, whether through occupancy, services, or business arrangements.

The IRS defines a disqualified person to include:

❌ You, the IRA owner
❌ Your spouse
❌ Your parents, grandparents, and other lineal ascendants
❌ Your children, grandchildren, and their spouses
❌ Fiduciaries of the plan (anyone with control or authority over the IRA)
❌ Service providers to the plan (e.g., your accountant or financial advisor)
❌ Certain officers, directors, and 10%+ owners of companies related to the IRA
❌ Companies owned 50% or more by you or your lineal family

Not considered disqualified persons:

✅ Siblings, aunts, uncles, cousins
✅ Step-parents and step-children
✅ Friends or unrelated third parties

Key rule: Any use or transaction involving a disqualified person is prohibited, even indirectly. This includes hiring them to perform repairs, selling property to them, or allowing them to rent or use the space.

Cash-Only Purchases or Non-Recourse Financing

Most IRA real estate purchases are made in all cash. That’s because:

If your Roth IRA does not hold enough to cover the full cost, non-recourse financing is the only permitted debt option. But any income or gain tied to the debt portion can expose the IRA to UBIT.

📝 Note: UBIT applies at the IRA level and must be reported using IRS Form 990‑T. It is not waived just because the IRA is a Roth.

All Expenses Must Be Paid by the Roth IRA

Since the property belongs to the Roth IRA, all expenses including repairs, taxes, insurance, and maintenance must also be paid by the IRA. You cannot use personal funds, even temporarily, to cover shortfalls.

This creates challenges when:

You cannot contribute extra funds beyond the annual limit without facing excess contribution penalties (6% excise tax per year until corrected).

Even when fully compliant, these expenses reduce the IRA’s investment balance—shrinking the base for tax-free growth.

📝 Note: Every dollar spent from the IRA for property expenses reduces compounding potential. This tradeoff can erode long-term returns unless carefully planned.

📌 Looking to invest in alternative assets with a Carry IRA? Here’s a guide to getting started.

Final Thoughts

Buying real estate with a self-directed Roth IRA can offer long-term tax advantages, but it comes with higher complexity, limited liquidity, and strict IRS rules. It’s important to weigh these tradeoffs carefully before committing retirement funds to physical property.

If you are considering this strategy, start by reviewing your retirement goals, account balance, and risk tolerance. Speak with a qualified custodian who specializes in real estate IRAs, and consult a tax advisor who understands UBIT and prohibited transaction rules. That combination of professional guidance and careful planning can help you decide whether real estate inside a Roth IRA truly fits your overall retirement strategy.

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