A self-directed IRA can own real estate. One wrong move can make it all taxable.

What makes an IRA "self-directed"

The term describes the custodian, not a separate type of account. A traditional IRA, Roth IRA, SEP, or SIMPLE IRA can be self-directed if the custodian allows investments beyond publicly traded securities.

Common holdings include rental real estate, raw land, private mortgage notes, interests in private funds or companies, and precious metals that meet IRS fineness standards. Federal law prohibits IRAs from holding life insurance and most collectibles, such as art, rugs, antiques, gems, and most coins.

Contributions, deductions, and distributions follow ordinary IRA rules. For 2026, the annual IRA contribution limit is $7,500, plus $1,100 for those 50 and older. Most self-directed accounts are funded through transfers or rollovers from existing accounts.

The prohibited transaction rules

The IRA must be operated for retirement savings, not for current personal benefit. It generally cannot transact with "disqualified persons," which include:

• You and your spouse.
• Your parents, grandparents, children, grandchildren, and their spouses.
• Fiduciaries and service providers to the IRA.
• Entities that you or other disqualified persons control, generally at 50% or more.

Prohibited examples include buying property from yourself or your children, renting IRA property to a family member, vacationing in an IRA-owned condo, doing repairs yourself, lending IRA money to your business, or pledging the IRA as security for a personal loan.

The consequence is severe. If the IRA owner engages in a prohibited transaction, the account generally stops being an IRA as of the first day of that year, and its entire value is treated as distributed, potentially with additional penalties if you are under 59½.

Some taxes still apply inside the IRA

An IRA is tax-exempt, but certain income is taxed inside the account:

• Unrelated business taxable income. If the IRA invests in an operating business through a partnership or LLC, its share of business income can be taxable.
• Debt-financed income. If the IRA buys real estate with a mortgage, the portion of income and gain attributable to the debt is generally taxable. Any loan must be nonrecourse to you personally.

When gross unrelated business income reaches $1,000, the custodian generally must file Form 990-T and pay the tax from IRA funds. These rules differ for a Solo 401(k), which can generally use certain real estate financing without the debt-financed income tax.

Valuation, liquidity, and the checkbook question

Your custodian must report the account's fair market value every year. For private investments, you will usually need to supply an appraisal or valuation. Unsupported valuations create problems for required distributions, Roth conversions, and inheritance.

Required minimum distributions from traditional IRAs begin at age 73 for most current retirees. If the IRA holds mostly real estate, you may need cash reserves in the account or must take a distribution in kind, transferring part of the property out at appraised value.

Some investors use an IRA-owned LLC with "checkbook control" to transact faster. That structure increases the risk of a prohibited transaction because you are directly handling IRA funds. Regulators have also warned that self-directed accounts are sometimes used to promote fraudulent investments, since custodians generally do not evaluate the merits of what you buy.

What your heirs inherit

Your IRA passes by beneficiary designation. For deaths after 2019, most non-spouse beneficiaries must withdraw the entire inherited account within 10 years, and annual withdrawals may also be required during that period if you had already begun required distributions. Spouses, minor children, disabled or chronically ill beneficiaries, and beneficiaries close in age have more flexible options.

Alternative assets make this harder:

• Heirs must find the custodian, obtain valuations, and decide whether to sell property or distribute it in kind.
• A beneficiary who does not understand the prohibited transaction rules can accidentally violate them.
• Withdrawing illiquid property within 10 years may force a sale at a poor time.

Name primary and contingent beneficiaries, and consider a trust drafted for retirement assets if beneficiaries are young or need protection. Leave written instructions describing each asset, the property manager, and key contacts. See beneficiary designations and your estate plan.

Is it right for you?

A self-directed IRA can make sense for an investor with real expertise in an asset class, enough diversification elsewhere, and the discipline to keep personal and IRA activity completely separate. It is a poor fit if you want to use the property, involve family members, or rely on the investment for near-term cash.

Before investing, confirm the custodian's fees, valuation requirements, and process for distributions, and have a tax advisor review the structure. The goal is the same as any retirement account: growth that your family can actually receive.