Self-Directed IRA Real Estate Rules: How People Lose the IRA

What the Code allows, and the two sentences that end an IRA

Nothing in the Internal Revenue Code lists real estate as a forbidden IRA asset. Section 408(m) treats the purchase of a collectible (art, rugs, antiques, gems, stamps and most coins) as a distribution, and section 408(a)(3) bars life insurance contracts (our reading of 26 U.S.C. 408). A custodian that allows it can hold a rental house, raw land, a promissory note secured by real estate, or units of a private real estate fund. IRS Publication 590-A says plainly where the danger is: “If your IRA is invested in nonpublicly traded assets or assets that you directly control, the risk of engaging in a prohibited transaction in connection with your account may be increased.”

Two sentences in the Code do almost all the work.

The prohibited transaction list, 26 U.S.C. 4975(c)(1). A prohibited transaction is “any direct or indirect” (A) sale or exchange, or leasing, of property between a plan and a disqualified person; (B) lending of money or other extension of credit between them; (C) furnishing of goods, services or facilities between them; (D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan; (E) act by a fiduciary who deals with plan income or assets in his own interest; or (F) a fiduciary's receipt of consideration from a party dealing with the plan. An IRA is a “plan” for this purpose (section 4975(e)(1)).

The result, 26 U.S.C. 408(e)(2). If the IRA owner or beneficiary engages in a prohibited transaction during a year, the account “ceases to be an individual retirement account as of the first day of such taxable year,” and section 408(e)(2)(B) treats it as distributing “all assets in the account” at their fair market value on that first day. A transaction in November reaches back to January 1. Good intentions do not matter: the Eighth Circuit, citing its own and Tax Court precedent, wrote that “Such transactions are prohibited even if they are made in good faith or are beneficial to the plan” (787 F.3d 1213). Publication 590-A adds two points: each IRA is a separate account, so only the IRA that took part loses its status, and the deemed distribution “may be subject to additional taxes or penalties,” which for a traditional IRA owner under 59½ usually means the 10% additional tax.

What the owner does not pay. Many pages say the owner also owes a 15% excise tax rising to 100%. The 15% and 100% taxes in section 4975(a) and (b) fall on other disqualified persons; for the owner and beneficiaries, section 4975(c)(3) provides an exemption “if, with respect to such transaction, the account ceases to be an individual retirement account by reason of the application of section 408(e)(2)(A).” Publication 590-A says the same: “If the traditional IRA ceases to be an IRA because of a prohibited transaction by you or your beneficiary, you or your beneficiary isn’t liable for these excise taxes.” The loss of the account replaces the excise tax; it is not added to it (our reading). A related rule: pledging the IRA as security for a loan does not end the account, but the pledged portion is treated as distributed (section 408(e)(4)).

Who is a disqualified person

The list is in section 4975(e)(2). For a self-directed IRA, the person who matters first is you: whoever “exercises any discretionary authority or discretionary control” over the IRA's assets is a fiduciary under section 4975(e)(3), and a fiduciary is a disqualified person. Everything else on the list hangs on that.

The last row is the one that surprises people. An LLC or corporation owned by your IRA is a separate entity, but once the IRA (whose fiduciary is you) owns 50% or more of it, the company itself is a disqualified person under section 4975(e)(2)(G), as the Tax Court found in T.C. Memo. 2013-245. Brothers and sisters, by contrast, are not in the statutory definition of family, though a deal with a sibling can still be prohibited if it is an indirect way to benefit you (our reading of the word “indirect” in section 4975(c)(1)).

Five decisions, five ways the IRA was lost (or kept)

The cases below are the ones the IRS and the courts cite on IRA-owned businesses and property. We cite them by official citation and Tax Court docket number; the dollar amounts come from the opinions.

What the cases add to the statute (our reading):

• Setting up the entity is not the problem; using it is. Under 106 T.C. 76, the IRA's first purchase of a new company's stock is not a deal with a disqualified person, because the company had no shares or shareholders before then. T.C. Memo. 2013-245 followed that reasoning for the initial investment and still found a prohibited transaction in what came next.
• “Indirect” is read broadly. In 140 T.C. 216 the court held: “Each of Ps' personal guaranties of the FP Corp. loan was an indirect extension of credit to the IRAs, which is a prohibited transaction.” It reasoned that if only a direct loan were caught, the rule could be avoided “simply by having the IRA create a shell subsidiary.” The same logic covers a personal guarantee on a mortgage that an IRA, or its LLC, takes out to buy a rental.
• A salary from your IRA's company is your IRA paying you. The Eighth Circuit wrote that by directing the LLC to pay him wages from funds that came almost entirely from his IRA, the owner “engaged in the indirect transfer of the income and assets of the IRA for his own benefit.”
• The IRS can come back years later. In 146 T.C. 100 the guaranty dated from 2003; the court applied the six-year assessment period of section 6501(e) because the return did not disclose the income. The appeal in the 2013 guaranty case was dismissed for lack of jurisdiction by the Tenth Circuit on December 18, 2014 (Nos. 13-9004 and 13-9005), so the Tax Court decision stands.
• Owning the asset through an LLC does not make personal possession safe. In 157 T.C. No. 10 the court said: “Personal control over the IRA assets by the IRA owner is against the very nature of an IRA.” It upheld accuracy-related penalties even though the owners' research had included a promoter's website advertising that coins could be held at home “without any tax consequences.”

A rental inside the IRA: what each everyday act is under the statute

The table maps common situations with an IRA-owned rental to the subparagraph of section 4975(c)(1) that applies. It is our reading of the statute and the cases above, not a ruling on any particular facts.

Two practical consequences follow. Every expense of the property, from property tax to a plumber, has to be paid by the IRA from IRA cash, and every dollar of rent goes back into the IRA. And a self-directed IRA that owns a rental needs enough cash inside it for vacancies and repairs, because you cannot lend it money (section 4975(c)(1)(B)) and new contributions are capped by the annual IRA limit (our reading).

Leverage: the non-recourse loan and the UDFI tax

An IRA can borrow to buy property, but two rules shape the loan. First, after 140 T.C. 216 and 146 T.C. 100, the loan must not carry your personal guarantee, which in practice means a non-recourse loan secured only by the property (our reading). Second, the borrowed share of the income is taxed.

The rule. Rents from real property are normally excluded from unrelated business taxable income (section 512(b)(3)). Section 514 overrides that for “debt-financed property,” which it defines as property held to produce income “with respect to which there is an acquisition indebtedness (as defined in subsection (c)) at any time during the taxable year.” The taxable share is the ratio of the average acquisition indebtedness to the average adjusted basis during the year (section 514(a)(1)), applied to income and, in the same proportion, to deductions (section 514(a)(2)). Gains count too, and the look-back on a sale is “the 12-month period ending with the date of such disposition”: paying off the loan eleven months before you sell does not take the gain out of the tax (section 514(b)(1)).

Who escapes it, and who does not. Section 514(c)(9) exempts real property bought with debt by a “qualified organization,” which includes “any trust which constitutes a qualified trust under section 401” but does not list IRAs. That is the reason a solo 401(k) can borrow to buy real estate without this tax while an IRA cannot, as our solo 401(k) vs SDIRA comparison explains for crowdfunding deals. A Roth IRA is not exempt either: section 408(e)(1) makes every IRA subject to the section 511 tax.

The rate. Under the Form 990-T instructions, trusts “are taxed at trust rates,” and IRAs, SEP IRAs, SIMPLE IRAs and Roth IRAs must file Form 990-T when they have “$1,000 or more of unrelated trade or business gross income.” The tax is paid from the IRA. For 2026 the brackets are in Rev. Proc. 2025-32, Table 5:

A worked example (our arithmetic, hypothetical numbers). An IRA owns a rental with a non-recourse loan equal, on average, to 60% of its adjusted basis during 2026. Net rental income after the same 60% share of deductions is $15,000. The debt-financed share is $9,000 (60% of $15,000). After the $1,000 specific deduction of section 512(b)(12), $8,000 is taxable. The 2026 tax is $330 on the first $3,300 plus 24% of the remaining $4,700, or $1,128, for a total of $1,458, paid by the IRA. The unleveraged 40% of the income is not taxed inside the IRA.

For real estate funds and REITs bought through an IRA, the answer depends on the vehicle: a REIT pays dividends, which section 512(b)(1) excludes, while a fund taxed as a partnership passes its debt-financed income through on the K-1 (our reading). Our Roth IRA crowdfunding comparison sorts platforms on this point.

Checkbook IRAs: what the IRS data show

A “checkbook IRA” is an IRA that owns an LLC whose bank account the IRA owner manages. GAO-20-210, a January 2020 report to the Senate Finance Committee's ranking member, describes it: the owner is “named the manager of the LLC with control over the checkbook,” which lets owners buy assets “without having to wait for custodians to execute a purchase or sale.” The GAO also reported the IRS's view of the risk: prohibited transactions may be more likely with checkbook access “in part because the marketing of this IRA structure is appealing to individuals who want less oversight of their IRA transactions and are more likely to intentionally engage in self-dealing transactions.”

Since tax year 2015, custodians must report hard-to-value IRA assets on Form 5498, with their fair market value in box 15a and a code in box 15b; for 2026 the instructions list code C for an LLC interest and code D for real estate. The GAO's analysis of the first data is the only official count we found of how many IRAs hold such assets:

The GAO's conclusion on enforcement: “Noncompliance involving unconventional IRA assets is difficult to detect and time consuming for IRS to pursue.” Prohibited transactions often appear on no return, and the general assessment period is 3 years (26 U.S.C. 6501(a)), which is one reason the six-year period in 146 T.C. 100 mattered. The report also described an IRS compliance project, using tax year 2017 Form 5498 data, that selected traditional and Roth IRAs with an ownership in an LLC or real estate for examination. We did not find a newer official count; the GAO-23-105367 report sometimes cited for this topic could not be located, and GAO-20-210 remains the latest public figure we can source.

What custodians check, and what happened to the SEC case against one

A self-directed IRA custodian holds title and files the forms; it does not approve the investment. The SEC's Office of Investor Education and Advocacy and NASAA put it this way in their joint investor alert on self-directed IRAs: “the custodians and trustees for these accounts will generally not evaluate the quality or legitimacy of an investment and its promoters.” The same alert cites estimates that investors held 2%, or $94 billion, of about $4.7 trillion in IRA assets in self-directed IRAs, and warns that fraud promoters steer investors into them.

Whether a custodian can be liable for its clients' bad investments was tested once by the SEC. On June 16, 2015 the Commission instituted proceedings against Equity Trust Company, alleging it was a cause of securities fraud by two promoters whose investments its clients held; the Enforcement Division alleged the two had defrauded more than 100 investors of $5 million invested through Equity Trust accounts (SEC press release 2015-121). An administrative law judge dismissed the charges, the Division appealed, and on September 28, 2017 the Commission dismissed the proceeding “because the record does not support a finding of liability” (Release No. 33-10420, File No. 3-16594). As of October 11, 2026 that is the final outcome of that SEC matter. Which custodians serve which crowdfunding platforms, and what they charge, is in our SDIRA custodian comparison; this page does not repeat it.

When a transaction is prohibited but makes sense: the DOL exemption route

Section 4975(c)(2) tells the government to run an exemption procedure, and IRS Publication 590-A explains that the Department of Labor has authority to grant administrative exemptions from the prohibited transaction provisions, for a class of transactions or for individual ones. The DOL must find that an exemption is administratively feasible, in the interest of the plan and its participants, and protective of their rights. The procedure is in 29 CFR part 2570, subpart B, last rewritten at 89 FR 4691 (January 24, 2024). Three of its rules matter for an IRA owner who wants, say, to buy a relative's building:

• Independence is measured in revenue. A qualified independent appraiser generally may receive no more than 2% of its current-year revenue from the parties to the deal, and the DOL treats 5% as the outer limit (29 CFR 2570.31(i)). An appraisal must be current and “not more than one year old” from the transaction date.
• Real estate needs a credentialed appraiser. If the asset is real property, the appraiser must represent that it is a member of a professional appraisal organization that can sanction its members (29 CFR 2570.34).
• After the fact is the hard way. The DOL “will not consider requests for retroactive exemptions if transactions or conduct with respect to which an exemption is requested resulted in a loss to the plan” (29 CFR 2570.35(d)(3)). The route is for deals planned in advance, not for repairing one already done (our reading).

What a reader can do with this

• Write down your disqualified persons before you invest. You, your spouse, parents, grandparents, children, grandchildren and their spouses, and every business 50% or more owned by any of them. If one of them is on the other side of the deal, or will use, manage, repair or rent the property, stop and get a written opinion first.
• Keep your own money and signature out of the property. No personal guarantee on the IRA's loan, no paying the IRA's bills from your checking account, no doing the work yourself. Each is a separate subparagraph of section 4975(c)(1).
• If the IRA borrows, budget the UDFI tax. Ask the lender for a non-recourse loan, compute the debt-to-basis ratio each year, and expect Form 990-T once gross unrelated income reaches $1,000. Remember the 12-month look-back if you plan to pay the loan off before a sale.
• If you use a checkbook LLC, act like a trustee. Keep the LLC's assets at the LLC or the custodian, never at home, and keep records showing fair market value each December 31 for the custodian's Form 5498.
• Do not assume the custodian checked the deal. Read the offering yourself and check the sponsor with your state securities regulator and the SEC.
• Know the clock. A prohibited transaction ends the IRA as of January 1 of that year, and the IRS may have six years to assess if the income was left off a return (146 T.C. 100).

FAQ

Sources, read and saved on October 11, 2026: 26 U.S.C. 408, 511, 512, 514 and 4975 (U.S. Code, 2024 edition, govinfo.gov); IRS Publication 590-A (2025), Instructions for Form 990-T (2025), Instructions for Forms 1099-R and 5498 (2026) and Rev. Proc. 2025-32; U.S. Tax Court opinions 106 T.C. No. 3 (docket 21203-92), 140 T.C. No. 12 (dockets 5951-11 and 6481-11), T.C. Memo. 2013-245 (docket 12960-11), 146 T.C. No. 7 (docket 11965-10) and 157 T.C. No. 10 (docket 1377-19), downloaded from the Court's public opinion system; the Eighth Circuit opinion in No. 14-1310 (June 5, 2015, govinfo.gov) and the Tenth Circuit order and judgment in Nos. 13-9004 and 13-9005 (December 18, 2014); GAO-20-210, Individual Retirement Accounts: IRS Could Better Inform Taxpayers about and Detect Noncompliance Related to Unconventional Assets (January 2020); the SEC and NASAA Investor Alert on self-directed IRAs; SEC press release 2015-121 and Commission opinion Release No. 33-10420 (September 28, 2017); and 29 CFR part 2570, subpart B, from the eCFR. Taxpayers in the Tax Court cases are identified only by citation and docket. The worked example, sums and readings marked as ours are our arithmetic and interpretation. This is analysis of public documents, not investment, legal or tax advice.