Self-Directed investors are familiar with the concept of Prohibited Transactions – a set of restrictions which define how the investor may interact with his/her property. The obvious ones are easy:
- Don’t live in it
- Don’t let linear relatives provide paid services
- Don’t pay for upkeep out of your own pocket.
On the flip side, Self-Directed investors also know that they may function as the non-compensated manager of the property in order to insure its viability and financial health. The area between these two parameters, however, touches upon a grey area of the law, and is frequently debated amongst legal experts.
If you use a Self-Directed retirement plan, it’s usually best to err to the side of caution and take a more conservative approach as to which interactions are permitted. Sweat equity, (i.e. non-compensated services that are physically provided to an asset,) is clearly not allowed. This would even include something like quickly cutting the grass. It is unclear, however, whether the IRS treats this as an impermissible non-cash contribution to an IRA, a Prohibited Transaction, or both. In either case, it is prohibited and could possibly incur legal ramifications for your account.
On the permitted side, legal experts consider management duties to be an acceptable responsibility for the account holder. Such duties include hiring workers and contractors, keeping the books, and writing checks from the LLC’s checking account. An easy way to think about this is that the investor may donate “desk” power but may not be involved in any physical upkeep.
If any questions arise as to the permissibility of a specific action, it always best to ask a qualified expert.