How does a real estate IRA work?

A real estate IRA is a self-directed IRA held at a specialized custodian that allows the account to own physical property rather than just stocks and bonds.
The mechanics are straightforward once you understand the structure.

You open an account with a real estate IRA custodian and fund it. Funding options include a rollover from a 401k or other employer retirement plan, a transfer from
an existing IRA at another custodian, or annual contributions up to the current limit ($7,000 or $8,000 if you’re 50 or older in 2026). Most investors funding a
first IRA real estate purchase are rolling over a previous employer plan.

Once funded, you identify a property to buy. The property cannot come from you, your family members, or any disqualified person. It must be an arm’s-length
purchase from an unrelated seller. You negotiate the deal, go under contract, and then direct your custodian to complete the purchase through a Buy Direction
Letter. The custodian wires IRA funds to the closing table and takes title in their name “for benefit of” your IRA.

The IRA owns the property from that point. All rental income flows into the IRA. All operating expenses including property taxes, insurance, repairs, and
management fees are paid from the IRA. You cannot personally pay any expense or receive any income from the property.

Tax treatment depends on your account type. Traditional self-directed IRA: tax-deferred growth until distributions. Self-directed Roth IRA: qualifying
withdrawals are tax-free, including all rental income and sale proceeds accumulated over years.

If you want to use financing, the loan must be non-recourse. An IRA real estate loan is secured by the property only, not your personal creditworthiness.
Non-recourse lenders exist specifically for this market, though they require larger down payments than conventional investment property loans.

Choosing among IRA custodians that allow real estate is one of the most consequential early decisions in the process.