“How do I use a self-directed IRA to invest in real estate, and what happens after I die?”
Inherited IRA real estate works very differently from property you leave through your will. In our September live Q&A, guest John Bowens of Equity Trust Company and Laura Dohanes, CPA, explained how an IRA holds property, who gets it, and what your heirs need to do — including the appraisal most people forget.
Quick answer: An IRA passes by its beneficiary designation, not your will, so start there. Your heirs don’t have to sell the property; they inherit the IRA that owns it. Most non-spouse heirs must empty an inherited IRA within 10 years; then the property can be distributed in kind, valued by an appraisal, and that value (not a step-up) becomes their basis. A spouse can treat the IRA as their own.
1. Directly. The IRA buys the property and the deed is in the IRA’s name, for example, “[Custodian], custodian FBO [your name] IRA.” All expenses and income flow in and out of the IRA.
2. Through a checkbook IRA LLC. You form an LLC that your IRA owns 100%. You’re the manager, the LLC has its own bank account, money flows from the IRA to the LLC, the LLC takes title, and all profits and expenses run through that account and back to the IRA.
Laura’s first point: these accounts don’t pass under your will. They go to the beneficiaries on file, and, as John added, they avoid probate as long as those are in place (they still count toward your taxable estate). So name the right ones when you open the account. Then think about the assets: do you want five heirs splitting one IRA full of real estate five ways, or one heir per account? Some of John’s clients set up separate IRAs and leave each one to a different child or grandchild.
Say you leave a Roth IRA that owns a rental to your child. They don’t have to liquidate the property. They inherit the Roth and can let it keep growing, but most non-spouse beneficiaries must empty the account by the end of the 10th year after your death. They can distribute the property itself (in kind) rather than sell it. John’s advice at that point: get a real appraisal from a licensed appraiser. For a Roth that meets the 5-year rule, the distribution is tax-free; with a traditional IRA, the appraised value is taxable income to the heir.
Some beneficiaries have other options: a surviving spouse, your minor child (until 21), someone disabled or chronically ill, or someone not more than 10 years younger than you. And if you leave a traditional IRA after you’ve started required minimum distributions, heirs on the 10-year rule also take yearly withdrawals in years 1–9. Check the rules for your situation.
Laura flagged an important nuance: property inherited outside an IRA usually gets a step-up in basis at death. Property inside an IRA doesn’t. Instead, the heir’s basis in property distributed from the IRA is its fair market value when it comes out, which is why the appraisal matters. That number is what they’ll use for depreciation and for figuring gain when they eventually sell.
A second question: what if a checkbook IRA LLC holds private company stock that can’t be sold, and the family can’t manage the LLC? John’s exit plan starts while you’re alive: distribute the stock out of the LLC back to your IRA custodian. That isn’t a taxable event, because the LLC is disregarded. At death, a spouse can treat the IRA as their own; a non-spouse inherits it as an inherited IRA, and either way they control the stock. If it’s worthless, the value can be updated (even to zero, with support) and the stock removed so they stop paying fees. If it may pay off, they can hold it, within the 10-year window for most children.
Official IRS reference: IRS — Retirement Topics: Beneficiary
No. They can inherit the IRA that owns it and later distribute the property in kind instead of selling it.
Most non-spouse beneficiaries must empty it by the end of the 10th year after the owner’s death. Spouses and certain other beneficiaries have other options.
No. The heir’s basis is the fair market value when the property is distributed from the IRA, which is why a professional appraisal matters.
The IRA (and the LLC it owns) goes to the beneficiaries. Simplifying first, such as distributing hard-to-sell assets back to the IRA custodian, makes it easier for them.
These answers come from our monthly open Q&A. Only newsletter members get the invite (real tax strategy for business owners, twice a week, no fluff).
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Guest: John Bowens, Director & Head of Education and Investor Success at Equity Trust Company, appeared as a guest. Custodians, including Equity Trust Company, do not provide tax, legal or investment advice.
Disclaimer: This article is for educational purposes only and is not tax, legal, or financial advice. Every situation is different. Talk to a qualified professional about your specific facts before making any decisions.
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