Paid the property tax bill from my own checking. $2,180 to fix.

Short version: the IRA owns a small rental, the tax bill came addressed to the custodian, the custodian forwarded it to me as they do, and I paid it online from my personal account because I was standing in line somewhere and it was easier than filing the payment authorization form. $1,240. Then a month later the water heater went and I paid the $380 invoice the same way, because at that point it was just how I'd been doing it.

I knew the rule. I'd read the rule. I just didn't connect a $1,240 online payment to the phrase "all expenses must be paid from the IRA," because in my head paying a bill for the house wasn't a transaction with the house.

Caught it when the custodian's year-end statement showed no tax payment out of the account and I went looking for where the money went.

What it cost: $900 to a CPA who does these, $780 to an attorney for a written analysis, and $500 in my own time I'm counting because it was three weeks of not sleeping well. Total $2,180 on a $1,620 mistake.

Where I landed, and this is the part I'd want somebody to tell me earlier: the fix depended entirely on facts I couldn't assess myself, and both professionals said the same thing about the exposure. It got treated as a contribution rather than the worse outcome, and I was under my limit for the year so it absorbed. Different facts and different amounts get a different answer, and that's exactly why you can't self-diagnose this from a forum post.

What I'd do differently: I'd put the custodian's expense payment form on my phone home screen the day I opened the account, and I'd have the tax bill mailed to the custodian directly with no forwarding to me at all. If I never touch the invoice, I can't pay it.

Answer

2monica_tran3SF4CPRO6

The structural fix is to stop being in the payment path. Two things I'd set up on day one for anyone running a service business or a rental inside one of these:

One, get the county to send the tax bill to the custodian's address, and set the account up so the custodian pays recurring bills on a standing authorization rather than a per-item form. Most of them offer this and most people don't ask because the sales conversation never mentions it. Whether your county will change the mailing address on request varies, so call them.

Two, hire a property manager and route everything through them, even if the property is small enough that you'd normally self-manage. The PM pays vendors from the operating account, remits net to the custodian monthly, and you are never holding an invoice. It costs 8 to 10 percent and it buys you a wall between your wallet and the asset. On a house throwing off a thousand a month that's a hundred bucks to not have the three weeks you just had.

The reason your version failed isn't ignorance of the rule. It's that the compliant path had more friction than the non-compliant path at the moment you were standing in line. Fix the friction and the rule enforces itself.

3 replies

2aliyah_bAU2APRO6

$2,180 to make a $1,620 problem go away, and you still don't get to keep the $1,620 as an expense. That's the number that gets me. I'm working out first deal costs and I hadn't budgeted anything for "professional fees when I do something stupid."

Genuine question: does the custodian not flag this? They can see the tax payment never came out.

4hannah_west29 Get yours

@tally no, and this is the part people get wrong about custodians. They process what you direct them to process. They don't audit you, they don't reconcile the property's expenses against the account's outflows, and their agreements say so in plain language. The compliance obligation sits with the account holder and nowhere else.

@thatch's PM answer is right on friction, but I'd disagree slightly that it's the whole cause. @bramble also had no cash reserve discipline, or the friction wouldn't have mattered, because a properly funded account with a standing authorization pays the bill before it ever reaches an inbox. The invoice arriving to a human being at all is the failure.

The cheap version of all of this: a written monthly checklist with two lines on it. Did any money touch this property that didn't come from the IRA. Did any money from this property land anywhere but the IRA. Five minutes.