Sweat Equity is Not Allowed with Real Estate IRAs

By J.P. Dahdah, CEO of Vantage Self-Directed IRAs


Real estate investors come in two primary categories, passive and active.  Passive investors are busy, don’t want to be bothered with the work associated with obtaining the desired return and their eyes light up when they hear the words “mailbox money.”  Active investors are the complete opposite.  They have a passion for getting their hands dirty and prioritize their schedule to ensure they can be personally involved in all of the activity that is required to produce the projected profits of the deal. Their eyes light up when they gain the satisfaction of knowing their direct labor eliminated “unnecessary” expenses which led to an increase in investment yield.  Regardless of which camp you feel you belong to, both types of real estate investors love learning they can direct their retirement savings into direct investments in real estate.

Once you are fortunate enough to have been told the truth about the fact that your retirement plan isn’t limited to stock market based options, there is typically a long list of questions regarding how Self-Directed IRAs work, which serve to help evaluate whether or not having a Real Estate IRA make sense for you and your family.  For active investors, however, the news that any amount of sweat equity activity is prohibited from being performed on IRA owned property can quickly create a negative reaction towards Self-Directed IRAs.  “Why would I open a Self-Directed IRA if I can’t do any of the work on the property myself?”  Obviously, the validity of the answer that follows that question varies based on whether or not the active investor is willing to accept and engage in real estate investment strategies that can produce the desired ROI without them performing the sweat equity.

If you are an active real estate investor that can’t get comfortable with any other method of investing in properties that don’t involve your direct labor, then a Self-Directed IRA is not for you.  If you are an active real estate investor and can be open to allowable strategies that can be executed without violating the prohibited transaction IRA rules, a Self-Directed IRA could be a great vehicle for you to enjoy tax-favored investment return within the asset class that you love, understand and feel most confident in.  The reality is there are plenty of ways to still be an active real estate IRA investor.  You can still identify the deals, select the people that will perform the labor to improve the property and you can oversee the work they are performing.  As long as the individuals and/or companies you select to do the work are not defined as “related parties” to your IRA under Internal Code Section 4975, you don’t even have to pay them for the work they do.  That’s right!  The IRA rules and regulations don’t force you to pay someone to do the work.  The rules simply preclude your IRA from engaging in any transaction (direct or indirect) with anyone or anything considered a related or disqualified party to your IRA, hence creating a “self-dealing” transaction.  Since you, the IRA account holder, are considered a related party to your IRA, you personally cannot perform the sweat equity on your IRA owned properties but a non-related party can.

So if the only thing keeping you from embracing a Self-Directed IRA investing in real estate is the sweat equity limitation, I hope that you contact us and learn how you can stay within the rules and maximize your IRA’s performance through real estate investing.

For more information about Real Estate IRAs, please visit: www.VantageIRAs.com/AZREIA