Self-directed IRA - exchange 1 property for another?

[Leigh Ann Smith]

We live on 35 acres, and purchased 10 acres of it (unimproved pasture) with a self-directed IRA. If we wanted to put a rental property in that IRA, could we then pull the pasture land out without tax consequences?

[Loren Whitney]

Just to clarify, the early distribution penalty of 10% ends at age 59.5, not 70.5. I believe Doreen was referring to required minimum distributions (RMDs) that begin at age 70.5. If you don't currently have a Roth IRA, you will pay ordinary income taxes on the fair market property value upon distribution.

Unfortunately, there is no legal way to "swap" assets. If purchasing a rental property in the IRA requires additional capital, it may require the sale of an existing asset.

Just for the record, one common in-kind distribution strategy is to stagger withdrawals into portions. Instead of distributing a property all at once, you could withdraw say, 20% over 5 years and re-register ownership proportions over time. This is simply a distribution tax strategy if you wish to have personal use. Note that the asset must be fully distributed before you can have personal use. As interests become divided, so do income/expenses in proportion. As a disclaimer, other distribution options exist and there is no one way to go about things. Be sure to create a plan that works for your scenario with your own financial/legal counsel.

Best of luck!