Real Estate IRA and Required Minimum Distributions
Starting at age 72, you may be required to take a minimum distribution from your real estate IRA or Solo 401(k) each year. This concept is referred to as Required Minimum Distributions (RMDs).
If your self-directed retirement plan is invested in larger, less-liquid assets like real estate you need to ensure you will have sufficient cash liquidity to make your annual RMD.
We get a lot of phone calls and emails from investors around age 70 who are a little panicked and think they may need to sell their investments. This is not the case. Let’s walk through some scenarios to see how RMDs apply and how to plan accordingly.
What Plans are Subject to Required Minimum Distributions?
Many IRA and 401(k) plans are subject to Required Minimum Distributions.
Since the passage of the SECURE Act effective December 31, 2019, the starting point for RMDs is the year the account holder turns 72.
All tax-deferred IRA types are subject to RMDs.
Roth IRAs are not subject to RMDs during the original account holder’s lifetime.
401(k) and similar defined contribution retirement plans are subject to RMDs on both tax-deferred and Roth sub-accounts.
RMDs also apply to a variety of inherited IRA plans dependent on when the original account holder died and who the beneficiary is.
Read more about RMDs on the IRS website.
How do RMDs work?
When an account is subject to RMDs the end of year account value for the previous year is used. This value is divided by a factor listed in the applicable life expectancy table provided in IRS Publication 590b. There are table variants for different types of account holders and beneficiaries.
Younger account holders are required to distribute a smaller amount of the account. As the account holder or beneficiary ages, a larger percentage of the account must be distributed each year.
The resulting value must be distributed from the IRA by December 31st. Failure to take a RMD results in an excise tax of 50% of the amount that should have been distributed.
A Real Estate Example
If your IRA holds real estate, or any illiquid asset for that matter, you need to know both the value of the account and the liquid cash value to plan for RMDs.
Your distributions need to be taken in cash. You can’t exactly distribute the front porch of your IRA rental property to yourself while leaving the rest of the property in the IRA.
It can take a bit of guesswork to estimate how your account will perform over time and what amount of cash will be available to meet your distribution needs.
The goal of the analysis is twofold, to help you plan how much you can take in IRA distributions and predict how long your IRA can continue to hold real estate before needing to sell and reinvest in more liquid assets.
Following is an example of how this forecasting exercise works.
What if You Take More than the RMD?
If you choose to take more than the required minimum amount each year, this will accelerate the process. Your IRA will reach the point at which there is no longer cash for RMDs earlier.
If you were to take an extra $5,000 in addition to the RMD each year, the cash crunch would occur at age 77 in the scenario we have outlined above.
Appreciation is, and is not, Your Friend
It is great to see the property that your IRA or Solo 401(k) is invested in increase in value. The downside, however, is the need to take a higher cash distribution based on that value.
It is possible to see your IRA increasing in total value while at the same time getting low on liquid cash to meet your distribution needs.
Because the value of the IRA is driving a taxable event in the form of RMDs, it is important that you maintain current and accurate valuation.
Of course, when property prices go up, rents tend to go up as well.
What About Distributing the Property?
You can take a property as a distribution in-kind from you IRA. This strategy is administratively feasible if you take the entire property out in one distribution, but that can result in a significant tax bill.
Fractional distributions of property over time are technically possible, but a very poor idea with significant costs, paperwork, and risk of IRS rules violations. We mention this option only because you will find such a strategy written about on the internet.
Just because something is “possible” does not mean it is a good idea.
Planning Your Exit Strategy
If you can predict roughly when a property will no longer produce sufficient cash for distribution needs, you can sell on your terms.
It may make sense to sell a few years early if the real estate market where the property is located is particularly hot. That can certainly beat being caught in a buyer’s market when you are in a position where you must sell.
You may also choose to sell before it is necessary if you know some of the major systems like roofing or HVAC may be due for repairs. Those fixes could eat up valuable cash.
Once you sell your IRA owned property, you can reallocate that capital in ways that will better meet your cash distribution needs.
In Summary
We hope this information has helped you to think about managing your real estate IRA well into your golden years if you choose to do so.
While understanding the math surrounding your portfolio and RMDs is important, it is just a starting point. There are many factors that go into planning for aging and ultimately the disposition of your estate. We strongly recommend you work with licensed counsel to evaluate your specific situation.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
