Buying Real Estate With IRAs: Complexities & Compliance Considerations
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Contents
- What Does It Actually Mean to Buy Real Estate With Your IRA?
- Self-Directed IRAs: The Basics
- Real Estate Inside an IRA: A Practical Example
- The Example: A Simple Long-Term Rental
- The IRS Rules: Where People Mess Up
- How to Build Up Enough IRA Money for Real Estate
- Moving Money Around
- Teaming Up
- Using Loans Within the IRA (But Be Careful)
- Foreign Real Estate: Why It’s More Complicated
- How Foreign Ownership Works
- The Reporting Headache You Can’t Ignore
- Taxes and Treaties
- Currency Risk
- Biggest Mistakes That Destroy IRAs
- Managing the Risks with Strategy and Structure
- The Real Risk Isn’t Going Offshore. It’s Staying Trapped Onshore
You’ve done the hard work: built a solid portfolio, contributed diligently to your retirement plan, and steered clear of financial fads. But if you’re like many high-net-worth investors, there’s a quiet unease when you scan your IRA.
It’s not the balance. It’s the exposure.
Stocks, bonds, mutual funds – they’re all tied to the same economic engine. And when that engine stutters, so does your retirement strategy.
But what if your IRA could hold real property? Not paper. Not promises. Real homes. Real land. Real cash flow. Whether it’s a rental in your hometown or a beach condo in Costa Rica, real estate offers diversification – and control – that Wall Street never will.
Yes, it’s possible. And, in fact, how to properly structure foreign real estate has become one of our most popular requests in recent years.
In this article, we’ll walk you through what works, what to avoid, and how to build long-term protection into your real estate IRA strategy from day one.
What Does It Actually Mean to Buy Real Estate With Your IRA?
Most people don’t realize how flexible an IRA can be. It doesn’t have to just hold stocks and bonds – it can own all sorts of assets, including real property. A duplex in your hometown. A house in Portugal. A parcel of raw land in Costa Rica.
The key to unlocking all this flexibility is to use a self-directed IRA – not the standard accounts offered by most banks or brokerage firms. A self-directed IRA opens the door to these “alternative” investments, including real estate, gold, private companies, and even crypto.
With real estate, here’s the key: your IRA – not you – becomes the legal owner.
- All purchase funds come from the IRA.
- All rental income flows back into the IRA.
- All expenses – repairs, taxes, insurance – must be paid by the IRA.
- And you? You can’t touch it.
You can’t:
- Live there.
- Let your kids rent it.
- Even fix the leaky faucet yourself.
That’s because the IRS sees any personal benefit as a prohibited transaction under Section 4975. Break that rule – even once – and your entire IRA could be deemed distributed.
That means:
- You owe taxes on the full account value at ordinary income rates.
- If you’re under 59½, you owe an additional 10% penalty.
- And there’s no way to undo it once it happens.
Self-Directed IRAs: The Basics
Most IRA custodians – your bank, brokerage, or insurance company – won’t let you buy real estate. They keep things simple: stocks, bonds, mutual funds.
To buy real assets, you need a self-directed IRA. These use special custodians (the business that holds your IRA) who will allow you to hold a domestic or foreign company you set up, specifically to hold assets allowed by the IRS rules. They don’t give advice. They just provide the “container” and handle certain IRS paperwork.
The easiest checkbook options are these:
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Traditional IRA: Tax-deferred growth; you pay taxes later.
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Roth IRA: Pay tax now, withdraw tax-free later.
With a self-directed IRA, you call the shots. That’s the upside.
The downside? You’re responsible for following the IRS rules.
Real Estate Inside an IRA: A Practical Example
Let’s walk through what a well-structured real estate investment inside an IRA actually looks like – without triggering compliance headaches.
The Example: A Simple Long-Term Rental
Suppose your IRA purchases a single-family home in a desirable rental market. Instead of managing the property yourself – which would violate IRS rules – you hire an independent property management company. The manager handles everything: tenants, maintenance, rent collection, and repairs.
You, as the IRA account holder, do not stay in the property. You do not perform repairs or collect rent. All income goes directly into the IRA. The setup is completely arms-length – and that’s exactly how the IRS wants it.
Why This Works
This structure avoids “prohibited transactions,” which are a major pitfall when managing IRA-owned assets. Because you aren’t personally involved – and because the IRA isn’t transacting with you or your family – it maintains its tax-deferred status.
Better yet, if the IRA uses a checkbook LLC structure – where your IRA owns a dedicated LLC that holds the property – you gain operational flexibility.
You can act as the LLC manager and sign checks on behalf of the LLC (not the IRA), provided you receive no personal compensation or benefit. This lets you handle logistics without crossing compliance lines.
The Bottom Line
Passive real estate income in an IRA is entirely possible – but structure and management matter. The safest setup?
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A long-term rental property, not a vacation unit.
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Held via a checkbook LLC, not direct IRA ownership.
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Managed by an independent property manager, not you or a family member.
With those safeguards in place, real estate in your IRA can be a stable, compliant, and tax-advantaged addition to your portfolio.
The IRS Rules: Where People Mess Up
The IRS allows real estate in an IRA – but only under strict conditions.
The biggest mistake we see? Clients or people close to the clients (“disqualified persons”) benefiting from the use of the property. The IRS calls this a prohibited transaction – something that can cause an immediate liquidation and tax of the account.
That means no living there, no renting to family, and no fixing it yourself.
It’s not all that difficult to avoid a prohibited transaction, but you do need to be aware of. It helps to have the right guidance. And that’s where we come in.
What You Absolutely Cannot Do
The IRS bans anything that gives you – or your close family – personal benefit.
That means your IRA can’t:
- Buy property from you, your spouse, your kids, your parents, or any business you control more than 50%.
- Let you live in, stay at, or vacation in the property.
- Let you repair, manage, or improve it – even minor work counts.
You must stay completely hands-off. Only investment returns are allowed. Nothing else.
Who Are "Disqualified Persons?"
According to the IRS, that includes:
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You.
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Your spouse.
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Your parents, grandparents, kids, grandkids – and their spouses.
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Any business controlled by the people above.
What that means in real life:
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You can’t rent the property to your adult child.
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Your spouse can’t manage it.
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Your brother can rent it – siblings aren’t disqualified.
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You can’t use your own real estate company to run it.
How to Build Up Enough IRA Money for Real Estate
Real estate isn’t cheap – and annual IRA contributions are limited.
In 2025, you can only contribute:
- $7,000 per year (or $8,000 if you’re 50 or older).
So how do investors fund these IRA real estate purchases?
Moving Money Around
You don’t have to start from scratch. Most clients fund their IRA real estate deals by shifting money they already have.
Options include:
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401(k) Rollover: Move funds from an old employer’s plan into a self-directed IRA.
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IRA Transfer: Shift money from an existing IRA to a new self-directed custodian.
Teaming Up
Your IRA can partner with other investors – including other IRAs, business partners, or even your personal funds – as long as the deal is structured correctly from the start.
Example: Your IRA owns 60% of a property. Your business partner owns 40%. Rent and expenses are split the same way.
Just be careful: if you mix IRA and personal money, it must happen at the time of purchase – not later – and each party must pay their exact share of costs and receive their exact share of income. Any personal use benefit, however minor, could trigger a prohibited transaction.
Using Loans Within the IRA (But Be Careful)
Most people are surprised to learn that your IRA can take out a non-recourse loan – a loan where the lender can’t go after your other assets if you default.
But there’s a catch: it may create Unrelated Debt-Financed Income (UDFI) – a subset of Unrelated Business Taxable Income (UBTI), a tax the IRS charges if the IRA produces “active” income, such as income from a business or from property bought with borrowed money.
That income is highly taxed – at trust tax rates, which hit 37% at just over $15,200 (2025 figures).
If this sounds complicated, that’s because it is. But here are the key takeaways:
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You can use debt within your IRAs, but it comes with pros and cons.
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Before you borrow, consult with an advisor who understands IRAs and UBTI to help you understand the potential tax consequences.
Foreign Real Estate: Why It’s More Complicated
Thinking of using your IRA to buy property abroad? It’s possible—but it comes with extra layers of legal and tax complexity.
The good news? The IRS doesn’t have a problem with it.
The catch? Many countries either don’t recognize US IRA structures or restrict foreign ownership. That means you’ll need the right setup—both locally and under US tax rules.
How Foreign Ownership Works
There are a number of ways to do it, all with advantages and disadvantages. What’s best for you will depend on your unique circumstances.
But in general, here are the options:
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Direct Title (Individual Treatment): In many countries, even if they don’t formally recognize US IRAs, local authorities will treat the purchase as if you (the account holder) are the owner. The title may list your name “as nominee for [Custodian Name] FBO Your IRA.” This keeps things simpler—but requires careful documentation to avoid trouble.
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SRLs (Sociedad de Responsabilidad Limitada): Common in Latin America, these entities function like LLCs. You may be required to use one to hold real estate. But if your IRA invests through an SRL, you’ll need to plan around US tax rules, including potential foreign entity reporting (e.g., Form 5471). Many other countries have broadly similar structures (GmbH’s in German speaking countries, Lda’s in Portugal, S.L’s. in Spain, etc).
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US LLC Holding Structure: Some investors set up a US-based LLC, owned by the IRA, to hold shares in a foreign entity. (If this sounds familiar, it’s the classic Checkbook IRA strategy.)
Bottom line: Any structure has to work in both countries – and pass muster with your US IRA custodian. If it fails on either side, you could face IRS penalties or get locked into an expensive fix abroad.
The Reporting Headache You Can’t Ignore
Own foreign property in your IRA? The IRS wants to know – in detail.
Outside of IRAs, depending on structure, you will usually have to file the following forms:
Form 8938 (FATCA): Required if the total value of your foreign assets exceeds IRS thresholds.
Form 3520: For transactions involving foreign trusts (like fideicomisos).
Form 5471: If you hold 10% or more of a foreign corporation, like an SRL.
FBAR (FinCEN 114): For foreign bank accounts tied to the property, if balances exceed $10,000.
Inside IRAs, however, the situation isn’t so clear. Generally:
Assets held directly by the IRA does NOT have to file these forms.
But structures owned by the IRA that then go on to hold accounts that would normally trigger such reporting might.
There’s a lively debate in the tax compliance industry about this. And the IRS hasn’t been terribly helpful in settling the debate.
Some advisors suggest that anything held in an IRA in not reportable. We take the position that, when in doubt, it’s better to declare.
Taxes and Treaties
Foreign-owned real estate often comes with extra layers of taxation:
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Property taxes: Charged annually – sometimes at higher rates for foreigners.
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Income taxes: Rental income may be taxed locally.
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Transfer taxes: Apply when you buy or sell.
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Withholding taxes: A cut taken from your rent before you receive it.
US tax treaties and foreign tax credits might provide some relief, but with IRAs, the situation is more complicated. Be sure you understand the tax picture before investing.
Currency Risk
When your IRA owns property abroad, currency movements become part of the picture.
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Purchase price: Exchange rates affect how much you’re really paying in US dollars.
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Rental income: Income received in local currency may vary when converted.
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Ongoing expenses: Timing matters – currency shifts can slightly raise or lower costs.
It’s not a dealbreaker – just something to factor into your planning.
Biggest Mistakes That Destroy IRAs
After 40+ years helping clients, we’ve seen (and helped avoid) every kind of mistake.
Here are some of the worst ones.
The "Quick Fix" Disaster
What happened: The AC breaks in your IRA-owned rental during peak season. To avoid delays, you step in and hire a contractor – or worse, fix it yourself.
The result: Prohibited transaction. The IRS disqualifies your entire IRA – because you provided a personal service to an IRA-held asset.
Takeaway: Even well-meaning fixes can backfire.
The better approach: Use a checkbook LLC structure. Your IRA owns the LLC, and you act as manager (uncompensated). As the manager, you can legally sign contracts, pay vendors, and hire contractors – so long as you don’t do the work yourself or profit from it personally.
Best practice: As the manager of the checkbook LLC, you can hire a third-party property manager. That keeps you entirely hands-off and ensures arms-length operations.
The Family Favor
What happened: Your adult son needs a place to stay, and your IRA-owned rental is sitting empty. You rent it to him – at full market rates.
The result: Prohibited transaction. The IRS disqualifies the entire IRA. Children are disqualified persons, no matter the rent amount.
Takeaway: Market terms don’t matter if the person is off-limits.
Best practice: Keep tenants and service providers entirely unrelated to you and your family. No gray areas.
The Professional Fee
What happened: You’re a licensed real estate professional. To save time and money, you manage your IRA’s rental – and charge a standard fee.
The result: Prohibited transaction. The IRS disqualifies the IRA. You can’t earn any compensation from IRA-owned assets – even at market rates.
Takeaway: You can contribute your expertise – but not get paid for using it.
Best practice: Treat your IRA’s assets like they belong to someone else – and act only in their interest.
Managing the Risks with Strategy and Structure
Owning real estate inside an IRA is different than owning it personally. Understanding those differences is key to staying compliant—and protecting your future returns.
Your IRA isn’t just another account. Legally, it’s a tax-deferred retirement trust where your role is to protect and grow assets for your future self—not to benefit from them today. That means:
No personal use.
No early profits.
No mixing personal and IRA resources.
If your IRA owns property directly (without an LLC), then the custodian holds legal title, and you have limited authority to act. You can’t sign contracts, pay vendors, or manage day-to-day affairs—everything flows through the custodian’s administrative process.
That’s why many investors use a checkbook IRA LLC. In this structure:
The IRA owns the LLC.
The LLC owns the property.
You are named manager of the LLC (not owner), giving you the ability to write checks, hire contractors, and manage the property—within strict rules.
The IRA remains the beneficial owner. You gain agility—while staying within the guardrails.
With that mindset, these common risks become manageable with the right strategy:
Prohibited transaction risk: Keep detailed records. Get expert help. When in doubt, stay conservative.
Liquidity risk: Keep cash or liquid assets in your IRA to cover distributions or emergencies.
Market risk: Research carefully. Diversify. Don’t assume appreciation – build in margin for error.
Currency and political risk: Choose stable jurisdictions. Hedge currency exposure where needed. Prioritize countries with strong property rights.
The Real Risk Isn’t Going Offshore. It’s Staying Trapped Onshore
Using your IRA to invest in real estate – especially internationally – can be one of the most powerful moves you make toward long-term wealth protection.
Done right, it offers:
Diversification beyond Wall Street.
Tax-advantaged income.
Ownership of real, productive assets across borders.
Foreign property adds more layers: local ownership restrictions, currency shifts, reporting traps, and international tax exposure. A beach condo might look simple – but it still needs be structured properly to avoid headaches.
The truth? This strategy works – but only if every piece fits together: the legal structure, the reporting, the funding, the management. That’s where our team comes in.
We’ve spent over 40 years helping internationally minded investors build compliant, flexible, and secure cross-border strategies. We know how to help you do this legally – and safely.
If you’re ready to explore how IRA real estate fits into a bigger plan to protect and grow your wealth globally, feel free to get in touch.
Because in today’s world, the real risk isn’t going offshore. It’s staying trapped onshore – and unprepared.
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We have 40+ years experience helping Americans move, live and invest internationally…
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We have 40+ years experience helping Americans move, live and invest internationally…
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