Advances in next-generation sequencing technology have enabled systematic exploration of the contribution of rare variation to Mendelian and complex diseases. Although it is well known that population stratification can generate spurious associations with common alleles, its impact on rare variant association methods remains poorly understood. Here, we performed exhaustive coalescent simulations with demographic parameters calibrated from exome sequence data to evaluate the performance of nine rare variant association methods in the presence of fine-scale population structure. We find that all methods have an inflated spurious association rate for parameter values that are consistent with levels of differentiation typical of European populations. For example, at a nominal significance level of 5%, some test statistics have a spurious association rate as high as 40%. Finally, we empirically assess the impact of population stratification in a large data set of 4,298 European American exomes. Our results have important implications for the design, analysis, and interpretation of rare variant genome-wide association studies.