Real Estate Tax Calc
How an SDIRA holds real estate
A self-directed IRA (SDIRA) is an IRA whose custodian permits alternative investments, including real estate. The IRA — not you personally — owns the property. All income flows back to the IRA, tax-deferred (traditional) or potentially tax-free (Roth). You cannot take personal use of the property, pay expenses from personal funds, or benefit from it outside the IRA without triggering a prohibited transaction.
The prohibited transaction rules under IRC § 4975 bar any transaction between the IRA and a disqualified person — you, your spouse, lineal descendants, ancestors, or entities you or they control. Violating these rules disqualifies the entire IRA, triggering immediate taxation of all assets.
No depreciation deduction
Because the IRA — not you — owns the property, you cannot claim depreciation on your personal tax return. The IRA itself is tax-exempt, so depreciation has no value inside it. This is a significant difference from direct ownership: one of the main benefits of owning rental property personally (depreciation against income) is lost inside an IRA.
UDFI: Tax on leveraged investments
If the SDIRA uses a mortgage (debt-financing), a portion of the rental income becomes Unrelated Debt-Financed Income (UDFI), subject to Unrelated Business Income Tax (UBIT) at trust rates — which can be quite high. The UBIT on UDFI is computed on Form 990-T, filed by the IRA custodian. This surprise tax often catches SDIRA investors off guard: they expected tax-free income but get a UBIT bill when leverage is involved.
An all-cash purchase inside the SDIRA avoids UDFI entirely, but eliminates the leverage that makes real estate attractive to many investors.
Prohibited transactions and disqualified persons in detail
The prohibited-transaction rules are the tripwire that ruins SDIRAs. Under IRC 4975, the IRA cannot buy from, sell to, lend to, or provide services benefiting a disqualified person: you, your spouse, your parents and grandparents, your children and grandchildren and their spouses, and any entity that these people own 50% or more of. You cannot buy a property you already own, rent it to your daughter, stay in it yourself even for a night, or hire your own company to manage it.
The penalty is severe. A prohibited transaction is generally treated as a deemed distribution of the entire IRA as of the first day of the year it occurred, making the whole balance taxable at once, plus a 10% early-distribution penalty if you are under 59½. There is no partial disqualification — one bad transaction can unwind the entire account, which is why SDIRA investors treat the rules with real caution.
No sweat equity — the custodian pays every bill
A rule that surprises hands-on investors: you cannot personally perform work on IRA-owned property. Painting a unit yourself, fixing a leak, or acting as an unpaid property manager is providing services to the IRA — a prohibited transaction. Likewise, every expense must be paid from IRA funds and every dollar of rent must return to the IRA; you cannot front a repair bill from your personal checkbook and get reimbursed later.
This is why SDIRA real estate works best for relatively passive holdings — turnkey rentals, notes, or raw land — and why many investors set up a checkbook-control IRA LLC, in which the IRA owns an LLC, the LLC owns the property, and you as a non-compensated manager sign the checks. The structure makes paying bills practical while keeping you from crossing the service and funding lines.
UDFI and UBIT, with a worked example
When an SDIRA borrows to buy property, the fraction of income and gain attributable to the debt becomes Unrelated Debt-Financed Income, taxed to the IRA as UBIT on Form 990-T. Example: the IRA buys a $200,000 rental with $100,000 down and a $100,000 mortgage — 50% debt-financed. Roughly half the net rental income (after an allocable share of expenses and depreciation, which the IRA does get to use on the 990-T even though you cannot personally) is UDFI.
UBIT is charged at trust tax rates, which compress fast — reaching the top 37% bracket at only about $15,650 of taxable income in 2025 — so the surtax can be steep on a meaningful property. On a leveraged sale, the debt-financed share of the gain is also UDFI, although debt paid off more than 12 months before the sale is excluded from that calculation, a timing point worth planning around before you list.
The non-recourse loan requirement
Because a disqualified person (you) cannot guarantee a loan to the IRA, any mortgage must be non-recourse — the lender's only remedy on default is the property itself. Non-recourse investment-property loans are a niche product: expect lower loan-to-value (often 50-65%), higher rates, and far fewer lenders than a conventional investment mortgage.
Personally guaranteeing the loan, or pledging the property for a loan you benefit from, is itself a prohibited transaction. This financing constraint, combined with the UDFI tax on whatever leverage you do use, is why many SDIRA real estate investors ultimately buy all-cash despite giving up the returns that leverage can add.
The solo 401(k) alternative
A qualified solo 401(k) can sidestep the UDFI problem that dogs leveraged IRA real estate. Under an exception in IRC 514(c)(9) for certain qualified retirement plans, acquisition debt on real property can be excluded from UDFI, subject to strict conditions — a fixed purchase price, no seller financing from a disqualified person, no participating loan features, and others.
IRAs do not qualify for this exception, so a self-employed investor who plans to use leverage often prefers a solo 401(k) over an SDIRA precisely to avoid the UBIT bill on debt-financed rent and gain. The trade-off is that a solo 401(k) requires legitimate self-employment income to establish and maintain, so it is not available to everyone.
RMDs and the liquidity problem
A traditional SDIRA is still subject to required minimum distributions beginning at age 73. Real estate is illiquid — you cannot easily distribute one-thirtieth of a building — so RMDs can force awkward outcomes: selling the property, distributing a fractional deeded interest that must be appraised annually, or keeping enough cash inside the IRA to cover each year's distribution.
A Roth SDIRA avoids RMDs entirely during the owner's life, which is one reason many real estate investors favor Roth self-directed accounts despite paying the conversion tax up front. Qualified Roth distributions, including all of the property's appreciation, come out completely tax-free.
Tax-deferred, but no depreciation, no capital-gains rate, no 1031
Inside an IRA the usual real estate tax levers simply do not apply to you. There is no personal depreciation deduction, no long-term capital-gains rate (all traditional-IRA distributions are ordinary income regardless of how the gain arose), and no reason to do a 1031 exchange because the IRA is already tax-exempt on the sale.
The upside is pure tax deferral, or tax-free growth in a Roth. The downside is that you forfeit the depreciation shelter, the preferential capital-gains rate, and the step-up in basis at death that make directly held real estate so tax-efficient. Whether the trade is worth it depends on your bracket now versus in retirement, and on how much you value the account's creditor protection and Roth tax-free compounding.
Custodial mechanics, valuation, and fees
An SDIRA needs a specialized custodian that accepts real estate; an ordinary brokerage IRA will not hold a deed. Expect annual account and asset-based fees, transaction fees on each purchase or expense, and a requirement to supply a fair market valuation of the property each year for IRS reporting on Form 5498.
Title must be held in the name of the IRA — for example, 'XYZ Trust Co. FBO Jane Doe IRA' — never your own name. Sloppy titling, commingling of personal and IRA funds, or a late valuation can create compliance problems even without a true prohibited transaction, so administrative discipline matters far more here than with a conventional stock IRA.
Frequently asked questions
Can I live in a property owned by my self-directed IRA?
No. Using SDIRA-owned property for personal benefit — even a vacation — is a prohibited transaction that immediately disqualifies the entire IRA.
Can a Roth SDIRA own real estate?
Yes. A Roth SDIRA can own real estate. All income and appreciation grow tax-free, and qualified distributions at retirement are tax-free — a powerful combination if the property appreciates significantly.
What is UBTI/UBIT in an SDIRA?
Unrelated Business Taxable Income (UBTI) is income earned by a tax-exempt entity (like an IRA) from a trade or business unrelated to its exempt purpose, or from debt-financed property. The IRA pays tax on this income at trust rates via Form 990-T.
Can I use leverage in a real estate IRA?
Yes, but the loan must be non-recourse (no personal guarantee), and the debt-financed portion of income and gain becomes UDFI subject to UBIT at trust rates. Many investors use a solo 401(k) instead, which can avoid UDFI on real estate acquisition debt under IRC 514(c)(9).
Can I do repairs on my SDIRA property myself?
No. Performing work on IRA-owned property is providing services to a disqualified person — a prohibited transaction. All work must be hired out and paid from IRA funds, not from your personal money.
What happens if I commit a prohibited transaction?
The IRA is generally treated as fully distributed on the first day of the year the transaction occurred, making the entire balance taxable, plus a 10% penalty if you are under 59½. The consequences are severe and usually irreversible.
Do I have to take RMDs from real estate in an IRA?
A traditional SDIRA requires required minimum distributions starting at age 73, which is awkward with illiquid property and may force a sale or a fractional-interest distribution. A Roth SDIRA has no lifetime RMDs, one reason many investors prefer it for real estate.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.