Dispersing of IRA/LLC?

Question

If I wanted to disperse an IRA/LLC that had real estate, and a small non-recourse loan attached to said real estate, is there any pitfalls to be aware of? I'm assuming there are lender specific rules which I'll explore, I'm wondering though if there is anyone with experience doing this, and if there's any issues to forecast/and ways to navigate them. Thank you in advance.

Scott Smith · Answer

@Brian Eastman @Carl Fischer - Ok, excellent, thank you. The property is the only the asset in the LLC, and I did a valuation.... I appreciate you're time, and that fills in some gaps for me.

Carl Fischer · Answer

@Daniel Dietz If it is a Roth account You can take it out/distribute it with little consequences-but for what reason? To live in it has been the only time I thought it was right in my 25 years of working with IRAs. @Brian Eastman laid it out quite nicely.

Brian Eastman · Answer

@Daniel DietzYour understanding is correct.Pretty much nobody says "I'm going to distribute $150K of Apple stock from my IRA to myself". Why would you do that with property an IRA has invested into?There are two considerations. The valuation of cash is easier, but an appraisal of real property is not a huge expense and is suitable for an IRA distribution.The bigger issue is taking a large distribution from the IRA in one tax year. By adding a large amount to your other income, you put all of your income for the year into a higher bracket.An IRA is most tax-efficient when you retain value in the account as long as possible and use that principal to accrue more value through investment gains. Distributions in smaller amounts over time will be taxed at a lower rate than a lump sum.Purchasing a property in an IRA, holding it for a few years, and then distributing that property basically means you have thrown aside the tax-sheltering benefits of an IRA in large degree. Say your IRA buys a property for $100K and you distribute it to yourself at some point in the future when it is worth $150K. You are now paying taxes on the $150K, and have not really sheltered the appreciation that has occurred. Between the initial purchase and then state/federal taxes on the distribution, you have likely paid between $140K - $160K for the property. If it accrued rents for a period of time into the IRA, that would be a benefit that would effectively "reduce your cost of acquisition" to some degree.

Brian Eastman · Answer

@Scott SmithWhat do you mean when you say "disperse"?Are you wanting to distribute the LLC and/or property out of the IRA to yourself?

Daniel Dietz · Answer

@Carl Fischer & @Brian Eastman am I understanding you guys correctly that if a person wants to take a property OUT of a Self Directed Account, it is much easier if it is sold INSIDE of that account, and THEN take that 'cash' out as a disbursement, since the 'cash' has a 'defined value', unlike a physical property that would need to be appraised etc....? Thanks, Dan Dietz

Brian Eastman · Answer

@Scott SmithWhat you are looking to do is possible, but it is complex. Please seek the guidance of a CPA or tax attorney.You can choose to distribute the whole LLC or simply take the property out of the LLC and distribute that. The pathway that works would depend on whether the LLC has other investments or you intend to use it for other IRA purposes in the future. If the property is the only asset of the LLC and there is a non-recourse loan in place, then distributing the whole LLC will make sense as you will not need to do anything with the loan. The LLC would still be on title and be the borrower on the note.If your intention is to refinance, it would still make sense to distribute the LLC, then re-title and refinance after the LLC is in your name. Whether you keep the LLC or move title out of the LLC to your name at that juncture is a question to ask of your counsel.The LLC will need to be formally valued and that value will set the amount of taxable income you will be creating by taking a distribution from the IRA. That is likely going to create a big tax bill.You may read on the internet about partial distributions over time to reduce the tax hit or at least spread it out. On a property with a loan, that will be like rebuilding the engine on a car while driving down the road. Just don't go there.In general, this is not a favorable strategy or an appropriate use of IRA funds.

Carl Fischer · Answer

LLC/real estate Value is important, type of account, your age, etc may affect Taxes and penalties- if they apply. I don’t see many clients distribute real estate unless it is to live in it and that may also have some consequences. Instead they will take distributions of cash and continue to make tax free income or convert a traditional Ira to a Roth.

Scott Smith · Answer

@Carl Fischer @Brian Eastman , Sorry - that should have said 'distribution', no dispersement.

Carl Fischer · Answer

@Scott Smith I would talk to your custodian/administrator and/or the attorney that set up your Ira LLC. However, like @Brian Eastman suggested we need to clarify “disperse”