Trading sweat equity in SD IRA

5 Replies

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.

Just pay each other, if you want.

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.

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

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???

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.

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