How to Open a Self-Directed IRA: Custodian Fees, Real Estate Rules and the UBIT Bill
Michael Whitman
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Trading since 2017, full-time since 2020
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YouTube creator, 137K subscribers
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Published 2026-11-07
To open a self-directed IRA, pick a custodian that holds alternative assets, open a traditional or Roth account with it, fund it by direct transfer or rollover, then direct the custodian in writing to buy the asset in the IRA's name. Every expense and every dollar of income must then run through the IRA.
To open a self-directed IRA, pick a custodian that holds alternative assets, open a traditional or Roth account with it, fund it by direct transfer or rollover, then direct the custodian in writing to buy the asset in the IRA’s name. From that day every expense and every dollar of income runs through the IRA, never through you.
The paperwork is the easy part. The two things that decide whether this works are the custodian’s fee schedule, which is a set of flat dollar charges rather than a fund’s percentage, and a short list of IRS rules that can turn the whole account into taxable income in one year. Both are priced in dollars below.
| One $300,000 rental held 10 years | Provider A | Provider B | Provider C | Provider C, checkbook LLC |
|---|---|---|---|---|
| How it charges | $395 a year + $150 per property | $219 + 0.17% of asset value over $50,000 | $495 flat a year | $999 setup + $495 a year + $299 from year 2 |
| Each purchase or sale | $150 | $175 ($250 with a loan) | included | included |
| 10-year total | $5,750 | $6,840 | $4,950 | $8,640 + state LLC fees |
Schedules read 7 Nov 2026 and named in the sources; letters are used so the table reads as a price comparison, not a recommendation. All three also list a $250 account-closing fee, left out above, and provider A charges $50 for each Form 990-T expense statement. Read the live version before you sign.
Before you start
Money to move by direct transfer or rollover, or a new contribution. Most of these accounts are funded from an old 401(k) or another IRA. A new contribution counts against the 2026 IRA limit, which is small next to the price of a building.
A specific asset already picked out, because the custodian will not vet it. The NASAA and SEC investor alert says self-directed custodians “generally do not evaluate the quality or legitimacy” of an investment or its promoter. The due diligence is yours.
The fee schedules of at least three providers, read and dated. Annual fee, per-asset fee, purchase and sale fees, the fee for a Form 990-T statement, and the closing fee.
The steps
1. Choose custodian-held or a checkbook IRA LLC
A custodian-held account sends every payment through the custodian. A checkbook IRA puts the money in an LLC the IRA owns, and you sign the checks. The trade-off is set out in the next section.
2. Price each fee schedule over 10 years
Use your own asset value, one purchase, one sale and the years you expect to hold. The table above shows how far apart three schedules land on the same property.
3. Check the custodian’s standing
Banks and trust companies can act as IRA custodians, and the IRS publishes the entities it has approved as nonbank trustees: 73 names on the list dated 1 Apr 2026. Some firms that sell these accounts are administrators working with a separate custodian, so ask which entity holds the assets.
4. Open the account as a traditional or Roth IRA
The tax treatment follows the account type, as the traditional IRA and Roth IRA pages explain. Provider A’s process starts with an online application.
5. Fund it by direct trustee-to-trustee transfer
The money moves institution to institution, with no withholding and no 60-day clock. The IRA rollover page covers why the direct route is safer.
6. Direct the custodian to buy, titled to the IRA
Sign the purchase documents as the IRA’s agent, with the custodian’s name for the account on the deed or the note. Your own name alone on the title is a mistake.
7. Pay every bill from the IRA and keep a cash reserve
Taxes, insurance and repairs come out of the account; rent goes into it. Provider C requires a $500 minimum cash balance per account, and an empty account cannot pay a surprise roof bill.
8. Report the asset’s value to the custodian every year
Provider A charges $50 for a late annual valuation update. The value feeds the account statement and, in a traditional IRA, any required distribution later.
Custodian account or checkbook IRA LLC
The custodian route is slower and harder to break. Every purchase, every repair invoice and every rent check passes through the custodian, which adds days and a transaction fee on some schedules, but it also means a second party sees each payment.
The checkbook route is faster and puts every decision on you. The IRA buys an LLC; you manage the LLC and write its checks. Provider C charges $999 to set one up, $495 a year, and a $299 annual compliance charge from year 2, before your state’s own LLC filing fees. On a $300,000 property that is $8,640 over 10 years against $4,950 for the same provider’s custodian-held account.
Two court cases show where checkbook owners get hurt. In Ellis, the Eighth Circuit (5 Jun 2015) upheld the Tax Court: Terry Ellis rolled 401(k) money into an IRA that took a 98% stake in a used-car LLC, and the LLC paid him a $9,754 salary in 2005, a prohibited transaction.
McNulty is the home-storage case. In McNulty (157 T.C. No. 10, 2021), an IRA-owned LLC bought American Eagle coins and the owner kept them in a safe at home; the court treated $374,000 and $37,380 of coin purchases as taxable distributions, with penalties.
A worked example: a mortgaged rental inside the IRA
This is a labeled hypothetical. On 1 Jan 2026 the IRA buys a $300,000 rental: $60,000 land and a $240,000 building, with $150,000 of IRA cash and a $150,000 non-recourse loan. The loan is interest-only at an assumed 7.00%, so $10,500 a year. Rent is $30,000 and operating costs are $9,000.
Depreciation is straight-line over 27.5 years. That is $8,727.27 in a full year and $8,363.64 in the first year, because a building placed in service in January gets 11.5 months.
Year 1: the tax is small, the filing is not. Net income is $30,000 - $9,000 - $10,500 - $8,363.64 = $2,136.36. The debt-financed share is the loan divided by the average adjusted basis, $150,000 / $295,818.18 = 50.71%, so $1,083.28 counts as unrelated debt-financed income. After the $1,000 specific deduction, $83.28 is taxed at the 10% trust rate: $8.33.
The filing still applies. The IRA’s share of gross rent is $15,212.05, over the $1,000 gross-income line, so the custodian must file a Form 990-T.
The sale is where the tax lands. Suppose the IRA sells on 31 Dec 2035 for $400,000. After $86,545.45 of depreciation the adjusted basis is $213,454.55, so the gain is $186,545.45. The taxable share of that gain uses the highest loan balance in the 12 months before the sale over the year’s average basis of $217,636.36.
| Loan in the 12 months before the sale | Debt / basis | Taxable share of the gain | 2026 trust-rate tax, capital gain rules | If all taxed at ordinary trust rates |
|---|---|---|---|---|
| $150,000 still owed | 68.92% | $128,571.43 | $28,235.85 | $45,677.23 |
| Paid down to $75,000 | 34.46% | $64,285.71 | $14,155.73 | $22,288.52 |
| Paid off more than 12 months before | 0% | $0 | $0 | $0 |
The tax column adds that year’s rental share and takes off the $1,000 deduction, taxes the depreciation part of the gain at no more than 25%, and the rest at the trust capital gain rates of 0% to $3,300, 15% to $16,250 and 20% above. Brackets are held at 2026 levels for 2035, and state tax is left out.
The original data
Across $100,000 to $1.5 million of property value, the three schedules split into two shapes. Provider A ($5,750 over 10 years) and provider C ($4,950 custodian-held, $8,640 checkbook) are flat. Provider B grows with value: $644 a year at $300,000, enough to pass provider A at $235,882, to pass the checkbook LLC at $405,882 and to reach $18,740 over 10 years at $1,000,000. Its $2,299 annual cap applies from $1,273,529. The full table is in the ten-year fee CSV.
The account’s tax schedule is the steep one. An IRA pays tax on unrelated business income at trust rates, and Rev. Proc. 2025-32 sets the 2026 trust schedule at 10% up to $3,300, 24% to $11,700, 35% to $16,000 and 37% above. On $16,000 of taxable income that is $3,851, against $1,672 on a single filer’s 2026 return.
The gap widens fast. On $50,000 it is $16,431 against $5,752, and a single filer does not reach 37% until $640,600. The numbers behind the curve are in the trust and single tax CSV.
What the gap means in practice. The Form 990-T instructions treat each IRA as a separate trust, so its debt-financed income meets the steepest schedule in the tax code on its own, and the payoff timing in the worked example is worth planning years ahead.
| Dataset | Covers | Pages citing it | Download |
|---|---|---|---|
| Ten-year self-directed IRA fees on one property, three published schedules | Property values from $100,000 to $1,500,000 in $50,000 steps, one purchase and one sale, value held flat | 1 | Ten-year fee table (CSV) |
| 2026 federal tax on the same taxable amount at trust rates and at single-filer rates | Taxable income from $0 to $50,000 in $500 steps | 0 | Trust vs single tax (CSV) |
The rules that can end the account
Section 4975 bans six kinds of dealing between the IRA and a disqualified person: a sale, exchange or lease of property, a loan or other extension of credit, furnishing goods, services or facilities, using the IRA’s income or assets for their benefit, a fiduciary dealing with the assets in his own interest, and a fiduciary taking a payment from anyone dealing with the IRA.
For real estate that rules out the obvious and some of the less obvious. No living in the property, and no vacation weeks in it. No renting it to your children. No buying it from your parents. No signing a personal guarantee on the loan, which is an extension of credit, so any loan has to be non-recourse. No painting it yourself, because your labor is a service to the plan.
The family list is shorter than most people expect. Section 4975(e)(6) names your spouse, ancestors, lineal descendants and the spouses of lineal descendants. Siblings are not on it, but a deal that benefits you through them can still fall under the “use by or for the benefit of” rule.
The penalty is the whole account. The IRS says an IRA whose owner engages in a prohibited transaction stops being an IRA as of the first day of that year and is treated as distributing everything at fair market value. Publication 590-A adds that the distribution may carry additional taxes or penalties.
The 401(k) exception. Section 514(c)(9) exempts debt-financed real estate held by a qualified trust under section 401 from the debt-financed income rules, subject to conditions. An IRA is not on that list, which is why the same mortgage can be taxed in an IRA and not in a solo 401(k).
How to tell it worked
Check four things within 30 days of the purchase closing. The deed or note names the IRA through its custodian, not you. The custodian’s statement shows the asset at the purchase price. The first rent deposit lands in the IRA or its LLC account, not your bank. And the fees charged match the schedule you priced in step 2, to the dollar, on at least one transaction.
When it fails
Fraud is the first failure mode regulators name. The 2011 NASAA and SEC alert lists promoters who misstate the custodian’s role, who use the early-withdrawal penalty to keep investors in longer, and who push alternative assets because their financial information is often unaudited. It also warns that a statement may show an asset at its purchase price or the promoter’s figure, neither of which is a sale price.
The second is a prohibited transaction nobody noticed. A weekend at the beach house, a loan from your own pocket to cover a repair, or a salary from the LLC, as in Ellis, is enough.
The third is a tax nobody planned for. In the example, selling with the loan still owed costs $28,235.85 of tax inside the account that waiting 13 months after a payoff would have avoided.
The fourth is fees on a small balance. $4,950 to $8,640 over 10 years is 1.65% to 2.88% of a $300,000 property, but provider C’s same $4,950 on a $50,000 holding is 9.90%.
Questions people ask
Can I buy a rental property with a self-directed IRA?
Yes. The custodian buys it in the IRA’s name, the IRA pays every cost and keeps every dollar of rent, and neither you nor a disqualified family member may use it.
Can a self-directed IRA get a mortgage?
Only a non-recourse loan, because your personal guarantee would be a prohibited extension of credit. The debt-financed share of the income and the gain then carries UBIT at trust rates.
Is a checkbook IRA legal?
No rule cited here bans an IRA from owning an LLC, but the owner then takes on every compliance decision. Ellis and McNulty both involved IRA-owned LLCs.
Can I hold real estate in a Roth self-directed IRA?
Yes. The Roth rules apply to the account, and UBIT still applies to debt-financed income inside a Roth.
Related
The traditional IRA and Roth IRA pages cover the two tax treatments this account can take. IRA rollovers explains the direct transfer most owners use to fund one. If the goal is property exposure without a custodian at all, REITs hold real estate inside any ordinary IRA, and gold IRA vs gold ETF runs the same fee arithmetic for metals.
This page is educational, not financial advice. Test every idea on your own charts before risking money.