Topic 05 · 6 min read
Self-Directed IRAs and Solo 401(k)s
Owning property inside a retirement account.
A self-directed retirement account can buy real estate instead of mutual funds. The rent and the eventual gain grow inside the account — tax deferred in a traditional account, potentially tax free in a Roth — but the rules about who may touch the property are strict.
What to know
- The account owns it, not you
- Title is held by the account. Rent goes in, expenses come out, and everything must flow through the account.
- Prohibited transactions
- You, your spouse, parents, children, and their spouses cannot use, rent, or work on the property. Even unpaid repairs by the owner can be a violation.
- Custodians
- A specialized custodian holds the asset and processes payments; ordinary brokerages usually do not offer this.
- UBIT on leveraged property
- If the account borrows to buy, part of the income can be subject to unrelated business income tax inside the account.
- No depreciation benefit to you
- The account is already tax-sheltered, so depreciation deductions do nothing on your personal return.
The tax benefit
Rental income and appreciation compound without current tax, and inside a Roth account qualified withdrawals can be tax free.
Worked example
The Roth rental
A Roth self-directed IRA buys a $150,000 rental with cash. Twenty years of rent and growth accumulate inside, and qualified withdrawals in retirement come out with no tax due.
Watch out for
- A single prohibited transaction can disqualify the entire account in one year.
- The account must hold enough cash to cover repairs and vacancies.
- Custodian fees and paperwork are heavier than ordinary ownership.
Terms from this topic
Self-directed IRAProhibited transactionCustodianUBIT
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