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A self-directed account can grant an investor many different opportunities such as the ability to invest in a variety of real estate investment types (commercial, residential, multi-family, and more). Each investment comes with its own set of expenses. Some are one-time fees that must be paid when you buy the property, while others are recurring expenses. Discover the unique rules associated with paying for real estate expenses through a self-directed account, as well as how the process just became easier.
General rules associated with paying for expenses with a self-directed account
1. Expenses/profits must flow through the account: When paying for expenses with your self-directed account, it is important that you’re aware of the rules so you don’t create a situation that could potentially compromise the integrity of your account(s). When your IRA or 401(k) owns real estate, your IRA or 401(k) is responsible for paying for 100 percent of the expenses associated with the property (or properties). For example, if you’re renovating a real estate investment you own with your IRA or 401(k), all supplies (paint, HVAC, flooring, etc.) must be paid from your account(s).
All your rental income and profits from the sale of the property must go directly back into the IRA or 401(k) to preserve the highly tax tax-advantaged nature of the accounts.
2. No personal use: If you personally pay for an expense and utilize your IRA or 401(k) attempts to reimburse yourself, that could be considered a prohibited transaction. This is because you’re considered a “disqualified person” to your IRA or 401(k). You want to make sure that your IRA or 401(k) is paying for 100 percent of the expenses.
3. Earnest money must come from the account: As you are approaching a real estate transaction, you must make sure that your earnest money deposit is paid for from the IRA or 401(k). A common mistake that investors make is to personally attempt to write a check for an earnest money deposit and then, after the fact, attempt to have their IRA or 401(k) come in to buy the property.