Can my IRA own real estate or a private business?
Allowed, but one prohibited transaction ends the IRA
Yes. A self-directed IRA can hold real estate, private company interests, or loans, but IRC §4975 bars dealings between the IRA and disqualified persons, including you and your close family. Under IRC §408(e)(2), if you engage in a prohibited transaction, the account stops being an IRA as of the first day of that year and its full fair market value is treated as distributed to you.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- A self-directed IRA follows the same contribution and distribution rules as any IRA; only the investment menu is wider.
- Disqualified persons include you, your spouse, your ancestors, your lineal descendants and their spouses, and fiduciaries of the account.
- A prohibited transaction by the IRA owner disqualifies the entire account as of January 1 of that year, not just the asset involved.
- Leveraged real estate and operating businesses can create unrelated business taxable income inside the IRA.
- Custodians generally do not vet the investment or police prohibited transactions for you.
What it is
A self-directed IRA is an individual retirement account whose custodian allows investments beyond publicly traded securities, such as rental property, private company stock or LLC interests, promissory notes, and precious metals that meet the statutory rules. The tax rules are the same as for any traditional or Roth IRA: the same annual contribution limit ($7,500 for 2026, with a $1,100 catch-up at age 50 or older, per IRS Notice 2025-67), the same distribution rules, and the same tax deferral or exclusion.
What changes is the risk. With a wider menu comes a wider set of ways to break the rules, and the penalty for breaking them is severe. The account can never be used to benefit you or people close to you before retirement distributions.
What the law says
IRC §4975(c)(1) defines a prohibited transaction as any direct or indirect sale, exchange, or lease of property, loan or extension of credit, furnishing of goods, services, or facilities, or transfer or use of plan income or assets between the plan and a disqualified person. For this purpose an IRA is a plan.
IRC §408(e)(2)(A) supplies the consequence for the IRA owner: if the owner or beneficiary engages in a prohibited transaction with the account, the account ceases to be an IRA as of the first day of that taxable year. IRC §408(e)(2)(B) then treats the account as distributing all of its assets, at fair market value, on that first day. The deemed distribution is taxable, and the 10% additional tax under IRC §72(t) can apply if you are under age 59½.
Requirements and tests
Before the IRA commits to any investment, test each party to the deal against the disqualified-person list in IRC §4975(e)(2) and the family definition in §4975(e)(6).
- You, as the account owner and a fiduciary of the account.
- Your spouse, parents, grandparents, children, grandchildren, and the spouses of your children and grandchildren. Siblings are not on the statutory family list, but deals with them can still be indirect prohibited transactions.
- Anyone providing services to the IRA, and entities that you or other disqualified persons own 50% or more of.
- No personal use: you cannot live in, vacation at, or rent from IRA-owned property, even briefly.
- No sweat equity: you cannot personally repair or manage IRA property for free or for pay.
- No personal backing of IRA debt: you cannot co-sign or pledge your own assets for an IRA loan, and IRA debt must be nonrecourse.
- All expenses must be paid by the IRA, and all income must be paid to the IRA.
How it works
The custodian holds title, and all money flows through the IRA. For example, if the IRA buys a duplex from an unrelated seller, rents come back to the IRA and property taxes and repairs are paid from it, all at arm's length. Gains stay inside the account until distribution.
Two tax items often surprise investors. First, if the IRA borrows to buy property, the debt-financed share of income is unrelated business taxable income, and the IRA may owe tax and have to file Form 990-T. Second, the IRA must report the fair market value of hard-to-value assets each year, so you will need supportable valuations.
If a prohibited transaction does occur, the account is treated as distributed on the first day of that year, even if the transaction happens in December. For an IRA owner, the account's disqualification replaces the §4975 excise tax that would otherwise apply.
Assumptions: Tax year 2026; single filer, age 50; Texas resident (no state income tax).; Taxable income from other sources, after the standard deduction: $80,000.; The IRA's fair market value on January 1, 2026 is $100,000; the owner has no basis in the IRA.; 2026 single rate brackets from Rev. Proc. 2025-32; no other credits or deductions change.
| Tax on $80,000 of taxable income | $12,312 |
|---|---|
| Tax on $180,000 after the $100,000 deemed distribution | $35,798 |
| Added income tax | $23,486 |
| 10% additional tax under IRC §72(t) (owner under 59½) | $10,000 |
| Total added federal tax, before any penalties | $33,486 |
If the IRA buys the property from an unrelated seller instead, none of these amounts is triggered.
Illustration only; not a projection of your results.
Risks and IRS scrutiny
The IRS identifies prohibited transactions through examinations, custodian reporting, and valuation reviews. Common problem areas include buying property from, or selling it to, a family member; paying yourself or a relative to manage or repair IRA property; and using an LLC owned by the IRA to pay your personal expenses. The IRS and the Securities and Exchange Commission have both warned that self-directed accounts attract fraud, because custodians generally do not evaluate the investments they hold.
If an IRA is disqualified, the tax, the 10% additional tax where it applies, and accuracy-related penalties can all apply, and the account's tax deferral is lost.
Who it is not for
This is not a fit if you plan to use the investment personally, want to do business with family, or intend to provide your own labor to the property. It is also a poor fit if you cannot fund expenses from the IRA itself, or if you are uncomfortable with illiquid assets that require annual valuation.
How ebotCPA helps
We map every party to the proposed deal against the disqualified-person rules, flag unrelated business taxable income and valuation issues, and set up a record-keeping plan so the account's position can be supported. We coordinate with your attorney, who drafts the legal documents.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
We coordinate with your attorney, who drafts the legal documents.
Frequently asked questions
Can my self-directed IRA buy a rental property from my parents?
No. Your parents are disqualified persons under IRC §4975(e)(6), so a sale between them and your IRA is a prohibited transaction.
Can I manage or repair a rental my IRA owns?
No. Providing services to the IRA is a prohibited transaction, whether or not you are paid. Use an unrelated manager and pay them from the IRA.
What happens if my IRA engages in a prohibited transaction?
Under IRC §408(e)(2), the account stops being an IRA on January 1 of that year and its full fair market value is treated as distributed, which is taxable and may carry the 10% additional tax.
Can a self-directed IRA use a mortgage?
It can use nonrecourse debt that you do not personally back, but income from debt-financed property can be unrelated business taxable income taxed inside the IRA.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.