FinancingRealEstateInvestment

Rollover to Real Estate: Use a Self-Directed IRA to Buy an Investment Property for Retirement Income

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2026-01-22

10 min read

Turn a 401(k) into rental income: rollover into a self-directed IRA, buy property, and avoid tax pitfalls. Practical checklist and 2026 trends.

Stop guessing retirement income — roll your 401(k) into real estate with a self-directed IRA

Feeling stuck: You want predictable retirement income but your 401(k) keeps you tied to the stock market. You’ve heard about buying rental property with retirement funds, but the rules, taxes, financing, and permit headaches look impossible. In 2026, there are clearer paths — and bigger pitfalls — than ever before. This guide walks you through how a self-directed IRA (SDIRA) can buy a rental property for retirement income, step-by-step, with practical cost and permitting guidance.

The elevator pitch — why investors are choosing real estate inside IRAs in 2026

Since 2023, many investors have moved some retirement capital into alternative assets to diversify away from volatile equities and low-yield bonds. Self-directed IRAs (SDIRAs) let you hold direct real estate instead of securities. If you roll a 401(k) into an SDIRA you can use those retirement dollars to purchase rental property that generates ongoing rental income — potentially tax-deferred (traditional IRA) or tax-free (Roth IRA) — provided you follow IRS rules and custodial policies.

Key concepts and tax rules you must know (2026 update)

Before we jump into the transaction checklist, understand the legal guardrails. These aren't optional.

Trustee-to-trustee rollover: A direct rollover from your 401(k) to an SDIRA avoids immediate taxes and penalties. Don’t take the distribution personally.
Title and ownership: The property title must show the IRA as the buyer — not you personally. Typical format: "ABC Custodian FBO John Doe IRA." For title handling and paperwork see resources on title processes and closing workflows (title & closing partners).
No self-dealing: You, your spouse, parents, children, and certain fiduciaries are disqualified persons. You can’t personally benefit from the property (no living in it, no repairs for free, no rent checks to you).
UBIT and UDFI: If the IRA earns income from an active business or uses leverage (non-recourse mortgage), it may incur Unrelated Business Income Tax (UBIT) or Unrelated Debt-Financed Income (UDFI). Expect to file Form 990-T when thresholds are met; for tax and market context see capital markets and tax guidance.
Roth vs Traditional: Buying property inside a Roth IRA means qualified distributions (after holding and age rules) can be tax-free. Rolling a pre-tax 401(k) into a Roth triggers income taxes on the conversion.
RMDs and retirement timing: Required Minimum Distributions (RMDs) still apply to traditional IRAs per current law; Roth IRAs have no RMDs for original owners. Check the latest after SECURE 2.0 updates from 2022–2024 and follow 2026 guidance for planning.

Real estate in an IRA is powerful, but compliance is strict — treat each step as a regulated financial transaction, not a normal house purchase.

Pros and cons — frank view for homeowners and investors

Pros

Tax-advantaged income: Rental income flows to the IRA, growing tax-deferred or tax-free depending on IRA type.
Diversification: Real assets cushion equity volatility and inflation, a 2024–2026 trend as yields regained attractiveness.
No capital gains tax at sale: Within the IRA: gains are tax-deferred (traditional) or tax-free (Roth), assuming qualified distributions.
Estate planning: Real estate in IRAs can be structured for heirs, though rules are complex.

Cons & risks

Liquidity and access: Retirement accounts have withdrawal constraints and potential penalties.
UBIT/UDFI exposure: Leveraged deals often trigger taxes inside the IRA.
Non-recourse loans: Financing options are limited and more expensive than conventional mortgages (higher rates, larger down payments).
Prohibited transactions risk: One mistake (personal use, paying a relative’s contractor, etc.) can disqualify the IRA and trigger taxes and penalties.
Operational complexity: All income and expenses must flow through the IRA; bookkeeping, contractor payments, permits and permits inspections are more cumbersome.

2026 trends affecting SDIRA real estate purchases

Recent years reshaped how retirees approach alternative assets. Here are the trends you should factor into decisions this year:

More custodians focused on alternatives: From 2024–2026, fintech custodians expanded SDIRA services for real assets, improving platforms and transparency. But custody fee structures vary widely — compare flat fees vs asset-based.
Regulatory attention: The IRS has increased audits involving prohibited transactions and UBIT reporting. Proper documentation is critical.
Short-term rental regulation changes: Municipalities tightened permitting for STRs after 2023–2025 growth, affecting income projections and insurance — see modern host operations for STRs (rapid check-in & guest experience).
Checkbook IRA caution: Checkbook IRAs (where the IRA owns an LLC controlled by the account holder) gained popularity but also scrutiny; they speed transactions but raise red flags for disallowed transactions if improperly used.
Institutional-grade lending: A growing number of specialty lenders provide non-recourse loans for SDIRAs, but expect higher rates and strict underwriting.

Step-by-step checklist: From 401(k) to rented roof over your retirement

Below is a practical roadmap, with cost and permitting notes you’ll need for budgeting and compliance.

1) Decide whether to roll and which IRA type

Compare traditional (tax-deferred) vs Roth (after-tax) rollovers. If you expect higher tax-free growth and can pay conversion taxes now, Roth is powerful for long-term rental income.
Talk to a CPA about the tax hit of converting a pre-tax 401(k) to a Roth in 2026 tax law context.

2) Select an SDIRA custodian that permits direct real estate

Ask prospective custodians these questions:

Do you allow direct ownership of residential rental real estate?
What are your fees (account setup, annual, transaction, escrow)?
Can you handle closing paperwork and title naming conventions?
Do you assist with Form 990-T filing if UBIT applies?
What restrictions or blacklisted investments do you have?

3) Execute a trustee-to-trustee rollover

Request a direct rollover from your 401(k) plan administrator to the chosen custodian to avoid withholding and penalties. Confirm the custodian’s funding timelines — real estate purchases often require coordinated closing windows.

4) Build the deal pipeline and do due diligence

Key due-diligence items specifically important for SDIRA purchases:

Title search confirming clean title and lien status; ensure title will be issued to the IRA/custodian.
Zoning and permitting checks — verify that planned rental or renovation work is permitted. If you need a permit for leasing (e.g., STR), verify municipal restrictions.
Insurance quote naming IRA/custodian as insured/insured interest. Landlord insurance is different from homeowner policies; add liability coverage.
Rental market comps and vacancy assumptions; use conservative income assumptions for retirement planning.
Contingency reserve for maintenance, repairs, permit delays and tenant turnover — plan 6–12% of rental income plus a capital expenditures reserve.

5) Arrange financing if needed — know the costs

Most traditional lenders won’t make recourse loans to IRAs. You’ll use a non-recourse loan in the name of the IRA or fund the purchase fully in cash inside the IRA.

Non-recourse loans typically require 25%–40% down. In 2026 expect higher down payments and interest rates vs conventional loans.
Calculate UDFI if the IRA uses leverage: a portion of rental income allocable to the debt is taxable inside the IRA.
Estimate financing costs: lender fees, interest rate premium (often 1–3% above conventional), and higher closing costs.

6) Close the property correctly

How to handle closing day:

Escrow and purchase agreement must reflect the IRA/custodian as buyer.
All closing funds come from the SDIRA — not your personal accounts.
Title insurance must name the IRA/custodian as insured party. Confirm with the title company early.

7) Manage operations — rentals, repairs, permits and contractors

Operational rules that trip up owners:

All rental income and expense flows to/from IRA bank account controlled by custodian. You cannot accept rent checks personally.
Permits and contractor contracts should note the IRA as owner — invoices must be paid from IRA funds. If a contractor requires an address, use the property address but ensure invoices are addressed to the custodian or the IRA.
No personal labor or “sweat equity.” You cannot personally perform unpaid repairs or renovations on property owned by your IRA.
Keep detailed records: receipts, permits, contractor contracts and photos to justify arm’s-length transactions in case of audit. Use modern observability and tracking practices for bookkeeping and audit readiness.

8) Yearly tax and compliance steps

Monitor UBIT/UDFI thresholds. If applicable, the IRA or custodian files Form 990-T.
Custodial fees and property-related expenses should be paid from the IRA. Document everything for tax and RMD planning.
Review estate implications and named beneficiaries for your IRA-held real estate.

Practical cost guidance: realistic budget line items

Below are common costs for budgeting a rental property purchase inside an SDIRA. Replace percentages with your deal-specific numbers. For broader budgeting and pricing context see the Cost Playbook 2026.

Purchase price: 100%
Non-recourse loan down payment: 25%–40% if financed
Closing costs: 2%–5% of purchase price (title, escrow, recording fees)
Custodian transaction/annual fees: $500–$3,000/year or 0.25%–1% of assets depending on custodian
Title insurance: 0.5%–1% depending on state
Property insurance: Landlord policy typically $800–$3,000/yr, higher for STRs; name custodian as insured
Permits and inspections: $200–$5,000+ depending on scope of renovations and local rules
Repairs & maintenance reserve: 6%–12% of annual rental income
Property management: 6%–12% of rent for local managers; more for STRs
UBIT/UDFI tax reserve: Varies — plan to set aside 15%–30% of taxable portion of net income when leveraging

Advanced strategies and alternatives (with 2026 cautions)

Checkbook IRA (IRA-owned LLC)

Pros: Faster deal execution and direct control over transactions without custodian approvals. Cons: Greater IRS scrutiny, strict separation required, and higher risk of prohibited transactions. If you pursue this route, consult an experienced ERISA/IRA attorney and custodian experienced with checkbook IRAs — see legal workflow practices (docs-as-code for legal teams).

Fractional & platform-based alternatives

If you want real estate exposure without the operational burden, consider real-estate crowdfunding or REIT-like offerings that accept IRA funds. In 2025–2026 more platforms began accepting SDIRA investments, offering diversification and lower liquidity constraints, but vet fees, track record and platform solvency carefully.

Using a Roth conversion strategically

Converting a 401(k) to a Roth prior to purchasing property inside a Roth IRA can make rental income and future sales tax-free — a powerful long-term strategy if you can pay conversion taxes now. Model the tax cost vs. expected tax-free growth over retirement horizons to validate the conversion.

Checklist recap — ready-to-print action items

Meet with a CPA and IRA attorney to confirm suitability and tax implications.
Select an experienced SDIRA custodian that explicitly allows direct real estate.
Execute a trustee-to-trustee rollover from your 401(k) to the SDIRA (or convert to Roth after tax planning).
Identify target properties and complete title, zoning, and permit due diligence.
Secure non-recourse financing if needed and model UDFI/UBIT impacts.
Close with the IRA/custodian on title; ensure escrow and insurance names are correct.
Operate the property strictly as an IRA asset: income and expenses flow through the IRA, no personal use.
Maintain robust records and file Form 990-T if UBIT applies.

Final tips — avoid the top mistakes

Don’t use personal funds for repairs or accept rent personally — that’s the most common fatal error.
Start small if you’re new to SDIRAs: one property managed by a reputable manager minimizes operational mistakes.
Always verify local permitting and STR rules — policy changes through 2024–2026 have tightened short-term rental viability in many markets.
Keep custodial and tax advisors in the loop; document every step in case of IRS inquiry.

Where to get help (who to call and what to ask)

Certified Public Accountant (specializing in UBIT and retirement tax planning): Ask about Roth conversion timing and 990-T filing.
IRA custodian experienced with real estate (get fee schedule and transaction SLA).
Real estate attorney or title company experienced with IRA-owned property titles.
Non-recourse lender familiar with SDIRA loans.
Local property manager familiar with landlord-tenant law and permitting.

2026 call-to-action — plan smart, act compliant

Rolling a 401(k) into a self-directed IRA to buy rental property can be a game-changer for retirement income — but only if you follow the rules and budget for financing, insurance, permitting, and UBIT/UDFI. Start by talking to a CPA and choosing a custodian that specializes in real estate. Use the checklist above as your project map and keep meticulous records.

Ready to take the next step? Download our free SDIRA real estate checklist and sample closing packet, and schedule a 15-minute consult with our recommended custodial partners to compare fees and timelines. If you want, send over a property address and we’ll help you model the purchase with real-world financing, insurance and permit cost estimates for 2026.

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