Real estate held within a Real Estate IRA is no different than real estate held elsewhere.

Most of the same general principles that are applicable to any other real estate investment apply to Real Estate IRA properties, including contractor selection and hiring. This piece will deal primarily with the specific issues that apply to Real Estate IRAs (as well as real estate investments held within self-directed 401(k)s, SEPs, SIMPLE IRAs and other tax-advantaged accounts).

• Observe prohibited transaction rules. When you own a Real Estate IRA, there are certain restrictions on whom you can bring on as a contractor to help fix, repair or renovate your Real Estate IRA First of all, you cannot hire yourself. You cannot work for direct compensation or salary in any capacity in your Real Estate IRA. The IRS enforces very strict laws that prohibit you from using your Real Estate IRA to transact directly with yourself, your spouse, your children, grandchildren, parents or grandparents or those of your spouse, as well as any advisor who works with you on your Real Estate IRA in a fiduciary capacity. The same goes for any corporation or other business entity they control.

Simply put means you may be able to hire your brother to do the drywall, but not your son-in-law. And you can hire your brother-in-law’s landscaping company, but not your son.

Don’t try to pay yourself a salary for overseeing or managing your property held within a Real Estate IRA. You can do general management work without compensation, other than the eventual increase in value of the property. But you cannot take a salary, or the IRS could disqualify some or all of your IRA account, force you to take an immediate distribution, and then you’ll have to pay potential taxes and penalties on everything you take out.

The best way to select contractors is to use an arm’s length bidding process to find the best value, while disqualifying prohibited individuals.

• Do not mingle personal and Real Estate IRA The second principle is you must keep personal and IRA accounts strictly segregated. If you hire a vendor or contractor to help repair your Real Estate IRA property, you must make all payments solely with money from within the IRA account. This means you must make these payments only with money that you rolled over to the account, contributed to the account directly, or with profits generated from within the Real Estate IRA.

Naturally, like any property owner, you should use only properly licensed and bonded contractors, and verify that each contractor who sets foot on your property carries important insurance coverage like worker’s compensation insurance and/or construction defect insurance. Failure to do so exposes your Real Estate IRA to tremendous potential risk.