Can a Roth IRA own real estate directly?
Yes. Federal IRA rules do not prohibit an IRA from owning real estate. In practice, direct real estate is usually held through an IRA custodian or trustee that offers self-directed IRA investments and is willing to hold alternative assets such as real property.
This means a Roth IRA can potentially own a rental property, commercial property, land, or another permitted real estate investment. The property is owned by the IRA, however, not by you personally. Investors considering this approach should understand both the IRA ownership rules and the prohibited transaction restrictions before acquiring property.
For a broader explanation of the process, see our guide to investing in real estate with a self-directed IRA.
What rules apply to Roth IRA real estate?
The biggest concern is avoiding a prohibited transaction. IRS rules restrict transactions between an IRA and certain disqualified persons, including the IRA owner, a spouse, ancestors, lineal descendants, and certain related fiduciaries or entities.
- The property should be purchased and held for the benefit of the IRA rather than for your current personal benefit.
- You and other disqualified persons cannot use IRA-owned property as a residence, vacation property, or other personal-use property. See our explanation of personal use of IRA-owned real estate.
- Avoid sales, exchanges, leases, loans, or other transactions between the IRA and a disqualified person unless a qualified professional has confirmed that an applicable exception exists.
- Property income and expenses should generally remain within the IRA structure rather than being paid to or received personally by the IRA owner.
A prohibited transaction involving the IRA owner or beneficiary can cause the affected IRA to lose its IRA status, potentially creating significant tax consequences.
Does Roth IRA treatment make the real estate tax free?
A Roth IRA has different tax treatment from a traditional IRA. Contributions are generally made with after-tax dollars, and qualified Roth IRA distributions can be tax free when the applicable requirements are satisfied.
That does not mean every tax issue connected with IRA-owned real estate disappears. For example, borrowing money to acquire real estate can create unrelated debt-financed income and potentially unrelated business income tax. If financing will be used, review the rules for financing real estate inside an IRA before closing.
Do you need to buy real estate directly?
No. Direct ownership through a self-directed Roth IRA is only one way to obtain real estate exposure. Depending on the account provider and investment objectives, a Roth IRA may also hold publicly traded REITs, real estate funds, or other real estate-related securities. Our separate FAQ explains using an IRA to invest in REITs.
The important distinction is that a Roth IRA is not limited to indirect real estate investments. Direct ownership can be possible when the custodian permits the asset and the transaction is structured to comply with IRA rules.