Self-directed IRA - exchange 1 property for another?

Question

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 · Answer

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!

Loren Whitney · Answer

@Leigh Ann Smith

There's no 20% rule per say. The distribution strategy is up to you in terms of X% over Y-years.

Your last questions is a creative one, nice work! IF you could subdivide the lot into separate legal parcels then yes, you could take an individual parcel from the plan for personal use. That being said, be exetrmely careful to document any and all transactions. You can imagine that owning adjoining lots personally and with your IRA may raise some red flags in the event of an audit.

Doreen Chaisson · Answer

If you had the property rezoned while it's in your IRA, that might be a good solution for your distribution goals, if your local zoning allows for it. You'd go from having one asset in your IRA to having 5 separate assets, so you might want to check to see what impact, if any, this would have relative to the fees you are paying your current custodian to hold your Real Estate asset.  Each parcel would need to be reregistered/deeded in the IRA's name.  At that point, you would then be able to distribute individual assets (parcels) in their entirety, allowing you to begin making personal use of them, while still accomplishing your goal of minimizing the annual tax burden of these distributions.  Again, I echo Loren's suggestion to check with your own attorney or accountant before making any changes.

Leigh Ann Smith · Answer

Thanks, @Doreen Chaisson and @Loren  Whitney !  Good answers to my question.

Doreen, we've done everything on the up and up with the 10 acres.  We bought it from the same person (unrelated) that we bought the rest of our property from, and it's just sitting back there growing grass, so we're fine on all that.  That's the reason we'd like to take distribution of it - so that we could actually use it for something.  On the bright side, my husband is now 56.5 years old, so we'll be able to do that soon enough....if we want to pay the taxes on it.  :-/

Loren, regarding the 20% rule, if we had the 10 acres surveyed into 2 acre parcels, could we take distribution of one of those parcels and use it, or would we have to wait until all 10 acres were distributed?

Doreen Chaisson · Answer

I apologize for my error - I was referring to the 59.5 early distribution penalty.

Doreen Chaisson · Answer

Hi there -

First, I am sure you are aware that it's a prohibited transaction for you to be making any personal use of the acreage owned by your IRA account.  If it abuts the land you personally own, you cannot use it, farm on it, or make any other kind of personal use (hunting, fishing, etc).  I am assuming you did not purchase these 10 acres from yourself, but from an unrelated 3rd party.  It is a prohibited transaction for IRA owners to buy from or sell to their IRA.  There can be no sale or exchange between IRAs and IRA owners.

You could take the land out of your IRA as a distribution-in-kind. If you take the 10 acres out of your IRA as a distribution-in-kind, and you are not yet 70 1/2, you will pay taxes on the value of that distribution, as well as an early distribution penalty.

Self-directed IRA - exchange 1 property for another?

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