Self Directed Conversions and "Adjusted Valuation" -Is This Real?

[Daniel Dietz]

(cross posted in SDRIA Forum also)

Hello All,

We have been investing with both SRIRAs and SOLO 401Ks for quite a few years now and are looking to do more, and have a few potential deals in the pipeline. I have read up on the concept/method of also using "Adjusted Valuations" when converting Traditionals to ROTHs,  and am very intrigued. Seems too good to be true, but there seems to be a lot of supporting evidence that it can work too. I first read about it in this book https://www.amazon.com/Keep-Ad... which seems to have a lot of 'case references in it.

For those not familiar with the concept the general idea is that you would have a specialized appraiser appraise your investment, which could be say a rental house, or in our case shares of an LLC that owns rental houses, and come up with a 'reduced valuation' due to ill-liquidity being real estate (vs say cash, stocks etc...) or 'minority control' in the case of an LLC (ours are 33% each). The examples in the book and elsewhere seem to vary from 15% to 35%.

An example of the concept would be your 3 way SDIRA LLC buys a rental for say 300K with 60k down and the balance of 240K on a non-recourse land contract with the seller. You then have in appraised with a 'reduced valuation of say 20% on each share being worth only 80K instead of 100K due to those shares not having majority (decision making) rights. Since each share is worth 80K but also has 80K in debt, the 'book value' is essentially $0.  So now you convert over from Traditional to ROTH and since the value is $0 you pay no 'roll over taxes'. Obviously this would be more advantageous in a 'leveraged account'

My questions for any of the experts or others out there who have used this method are;

1) Have you had clients that do this (or yourself) and does it work as straight forward as it sounds?

2) Is there any advantage to doing it in a SDIRA vs SOLO401K all other things being equal?

3) I assume there is no such things as a 'negative value' that a person could use as a tax deduction?

4) Is there any DIS-advantage to doing this strategy in general?

Thanks, Dan Dietz

[Daniel Dietz]

Thanks for the answers guys. @Brian Eastman I kind of wondered about being a bit to aggressive :-) That why I was hoping to hear from 'real world' people who are providers like you or even members who might have used this personally to get their input.

@Dmitriy Fomichenko I have not contacted either of them yet, but will be contacting Mat's office to get feedback as they are the ones who set up our LLCs for our SOLOs and SDIRAs. You were on my list to contact too since you are my provider, but good to know that IF people are doing it, that it is so rare from the sounds of it.

If any of you could confirm the *general idea* that if I were to buy a property with my Traditional for say 100K with 10K down (10%) that if I were to convert that to ROTH that I would only owe tax on the 10K of equity (which to my understanding it the same as FMV for leverage properties in rough terms) and not the other 90K of the loan? IF that is correct, it seems that I would want to do that earlier on before the equity builds up with all else being equal.

Thanks, Dan Dietz

@Brian Eastman