When Your IRA Investment Has Expenses, Put Away Your Checkbook

By Equity Trust Staff2 Comments

Repairs, utility bills, improvements, and property taxes are common expenses for any real estate owner.  When that owner is your IRA, it is important to remember these are alternative investments and need to be handled properly.  At Equity Trust, we have myEQUITY, our online account management portal, for clients to direct funds to pay for your investment’s expenses, but whether spoken or just pondered people wonder: "What could possibly happen if I used my personal funds or my credit card to pay for the expense, and then just have my IRA reimburse me?”

In a nutshell, the IRS could disqualify the IRA for engaging in a prohibited transaction. This event could result in the IRS assessing taxes on all investments ever held in the account, with associated penalties, going all the way back to when then the account was established.  The account owner might have to amend the tax filings for every year as well.   

The reason this could happen is you, along with anyone of lineal descent, is considered a disqualified individual according to IRS Publication 590.  When a disqualified individual is involved in a transaction, that transaction becomes a prohibited transaction per IRS Publication 590 and Internal Revenue Code 4975, with section(c)(1)(b) in particular calling out the involvement of credit. 

If you have questions about paying expenses, particularly if you are interested in purchasing materials or services from Lowe’s or Home Depot, please contact our Client Services Team to discuss how an asset’s expenses can be paid using your IRA funds.