Conflicting info asset valuation for in-kind RMD's from real estate

[John Cava]

Hi everyone,

I'm getting conflicting information from supposedly knowledgeable sources on this, so I wondered if anyone has been down this road and can direct me to a reliable info source.

I'm taking in-kind distributions from a SDIRA which is all in just one SF home. The question is this (numbers are just round for ease of calculation): Suppose the home is valued at $500K, and I took a $50,000 (10%) distribution last year, including what was owed for taxes. So then the house is 10% owned by The Person, and 90% owned by The LLC (income and expenses shared accordingly).

Now this year say I want to take the same percentage (10%) - and say it's a flat market and the house is still appraised at $500,000.  

When I report the value of the asset that I am taking the Distribution from, is it still $500,000, as per the current appraisal and receive $50,000? Or do I disregard the 10% portion owned by Me The Person, so I would take 10% of $450,000? In either case, The Person would now own 20% of the asset and the LLC would own 80%.

I've had authorities (not the IRS - that's my last resort) tell me both. Using the LLC asset only makes more sense to me, but I've heard it from tax attorneys for example that the appraised value is what's used each year, until The Person owns 100%, then it's game over.

If anyone has direct knowledge or first hand experience or can point me to a specific reference document (IRS perhaps?), I would greatly appreciate it!

Thanks,

John in Portland
 

[Brian Eastman]

@John Cava
Start by discussing the matter of valuation with your IRA custodian. Their policy may or may not require a certified 3rd party appraisal for any taxable event such as a distribution in kind.

Current valuation is all that matters here.  The rest is up to you.  

- If you want to own 20% of the property, then take the value that gets you there.  

- If you want to take specifically $50K, that may or may not equate to 10% of the total value. In that case, you could end up with person at 81.68% or 77.23% or whatever, and the IRA with the balance. It will then likely take more than 10 years to fully distribute the property as it appreciates in value.

The key to this exercise is that what was taken out last year does not matter.  The value resets, and the dollars you take out will determine the new equity split at that point in time.  

The same would be true if you had $500K of Apple stock and wanted to distribute it to yourself over a 10-year period.  You might have to take more or less than $50K in any given year to meet that target since the stock price would change over time.  Of course, you would not have a remaining equity split to deal with, but the dollars per distribution/time to distribute concept is the same.

BTW, in 16 years of setting up self-directed IRA plans, fractional distributions in-kind was my least favorite strategy. There is so much complexity and risk involved. If potential clients wanted to do that, we strongly encouraged them to work directly with a tax attorney with specific knowledge of IRA rules. (Not just any CPA, attorney, or even tax attorney).

[Brian Eastman]

@John Cava

I missed a key point of your original question, but it goes back to discussing valuation with your custodian.

You will value the property to get the new value.

The IRA at this time will own 90%, so the valuation the custodian cares about is that 90%. They are only concerned with current value of the asset on their books.

They likely want to also see the full value so they can illustrate they are paying attention as a recordkeeper.

[John Cava]

Thanks Brian - very helpful.  Agreed on the in-kind not being the best way to fly, but it was necessary for at least a couple of years - RMD's exceeded rental income and selling wasn't an option.  But selling in a couple years so this won't go on much longer.  Thanks again.