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Updated over 10 years ago, 07/15/2014

User Stats

54
Posts
11
Votes
Jim Bentley
  • Investor
  • Oklahoma City, OK
11
Votes |
54
Posts

Trading sweat equity in SD IRA

Jim Bentley
  • Investor
  • Oklahoma City, OK
Posted

I'm pretty sure I know the answer to this, but maybe not.  

I have 2 rent houses in a SDIRA.   I have someone whom I've been paying $25 do go over and do minor things like change the air filter, unclog a toilet, etc, since I'm not allowed to do this myself.  

I know someone else locally who's in the same boat.  We have the same genre of rentals.  Would it be permissible for he and I to work on each other's properties for free for these minor things?  e.g. he changes my air filters every three months, and I change his every three months.  When my renter calls with a clogged bathtub, I call him, and vice-versa.

User Stats

23,418
Posts
13,507
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Wayne Brooks#1 Foreclosures Contributor
  • Real Estate Professional
  • West Palm Beach, FL
13,507
Votes |
23,418
Posts
Wayne Brooks#1 Foreclosures Contributor
  • Real Estate Professional
  • West Palm Beach, FL
Replied

Just pay each other, if you want.

User Stats

332
Posts
107
Votes
Loren Whitney
  • Investor
  • North Idaho
107
Votes |
332
Posts
Loren Whitney
  • Investor
  • North Idaho
Replied

This will depend on how risk tolerant you are. One way is perfectly fine if they aren't disqualified but both directions could be considered an arrangement.

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User Stats

1,409
Posts
856
Votes
Daniel Dietz
Pro Member
  • Rental Property Investor
  • Reedsburg, WI
856
Votes |
1,409
Posts
Daniel Dietz
Pro Member
  • Rental Property Investor
  • Reedsburg, WI
Replied

Jim,

I am interested to here what the 'experts' here say on this. My guess is 'no, it is not OK'. I am in the same boat as you but only have one rental so far.

With that said, on both here and other websites, there has been a LOT of spirited talk about what constitutes 'sweat equity' in a property. I have read quite a few good arguments for 'maintenance' not being sweat equity. One poster's there, and if I remember he sighted some specific rulings, is that for it to be 'sweat equity' of the kind that would be prohibited under SDIRA rules it would have to *improve the value* of the property. What the IRS is try to prevent is owners getting 'paid' by putting 'sweat equity' into property and not paying tax on it (my understanding of it). 

So then, the question comes down to what 'improves' a property? Fixing a screen or picking up trash or the like? I would say no. Putting in new windows, siding, flooring, etc....? Yes I would say.

Just food for thought,

Dan Dietz

  • Daniel Dietz
  • [email protected]
  • 608-524-4899
  • User Stats

    17,822
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    Dmitriy Fomichenko
    Tax & Financial Services
    Pro Member
    #1 New Member Introductions Contributor
    • Solo 401k Expert
    • Anaheim Hills, CA
    6,194
    Votes |
    17,822
    Posts
    Dmitriy Fomichenko
    Tax & Financial Services
    Pro Member
    #1 New Member Introductions Contributor
    • Solo 401k Expert
    • Anaheim Hills, CA
    Replied

    I agree with @Loren Whitney that this sounds like an arrangement and would advise you against doing this. You will know for sure when DOL will knock on your door and ask for the explanation. Would you want to be in that situation just by trying to save few bucks???

    • Dmitriy Fomichenko
    • (949) 228-9393

    User Stats

    54
    Posts
    11
    Votes
    Jim Bentley
    • Investor
    • Oklahoma City, OK
    11
    Votes |
    54
    Posts
    Jim Bentley
    • Investor
    • Oklahoma City, OK
    Replied

    Thanks for the replies.  Much of my reason for asking the question in this forum was simply to get others' opinions as to whether the DOL/IRS would take a dim view towards this.  Obviously, that would not be worth trying to save a few bucks.  I'm not trying to bend the law.