Self Directed IRA Tax reporting?

8 Replies

For my current rental property, I file a Schedule E each year. And I have to track all expenses and income to do so.

Once I set up and fund an SDIRA via transfer from a regular IRA, what are the reporting requirements? When I buy and sell stocks now, there's nothing, the gains stay in the account, and it's only withdrawals I'll be paying tax on. Is it the same with the SDIRA, one time paperwork, and then only report withdrawals, or is it more complex than this?

@Frank M.

Hi Frank!

Your IRA provider will file form 5498 with the IRS to report the anual valuation and any contributions/rollovers. One thing to prepare for is a FMV (Fair Market Valuation) submission to your future IRA provider. Since real estate values is subjective, you'll need ot provide a manually prepared valuation so that your IRA provider can supply the IRS would accurate figures. Most providers aren't requiring full appraisals yet but FMV requirements are tighening up industry wide. There are no additional reporting requirements from your end IF you're purchasing a property for cash.

If you decide to leverage your IRA on the otherhand and take out a non-recourse mortgage, you'll need to file a 990-T form and pay any resulting taxes from the IRA balance. Think of the 990-T as your IRA's personal tax return. Any UBIT taxes are paid by the IRA, not it's holder.

Let me know if you plan on using a mortgage and I can talk more about UDFI (Unrelated Debt Financed Income).

While it's a long read, IRS publication 598 discusses UBIT in detail.

http://www.irs.gov/pub/irs-pdf/p598.pdf

Loren made a good point: UBIT on leveraged real estate inside of your self-directed IRA. @Frank M. you should consider self-directed 401k instead, it has several major advantages over SD IRA including avoiding UBIT on leveraged real estate. You can learn more by reading one of my BiggerPockets blog articles about it HERE.

Thank you both. I'm considering it for non-leveraged purchases.

Dmitriy - I know UBIT is an issue if leveraging inside the IRA, but I'll read your article to learn the rest.

@SenseFinancial - I read your articles. Much thanks, no doubt you know your stuff. Two questions -

For the Self Directed 401(k) - I do have some side income and a regular Solo 401. So I'm halfway there. If I transfer a large sum into that account and then move it to a Self Directed 401, is that going to raise suspicion of the IRS? It seems to me that since any side income (for me it's a couple thousand $/yr) can qualify one for the account which then opens the door to moving a lifetime of IRA or old 401k savings into that account.

Once the SD-401k is running, is it possible to move fractions of it to the SD-Roth 401k? e.g. the account has 1 property, no loans, worth $100K, 25% of the property is moved to the Roth side, tax paid from outside funds, and now the Roth owns 25%?

Again, thanks.

@Frank M.

If you already have a solo(k) plan then you're not actually starting a new 401k. You'll just be replacing your current plan documents with a new rule book conceptually. This is technically considered a restatement of plan documents.

What makes a solo(k) or individual 401k, self-directed, is the fact that the plan documents allow alternative assets among other things. Most solo(k) plans provided by brokerage houses are technically self-directed, however, their plan most likely restricts you to the investments sold through the brokerage.

What I'm getting at is that in the eyes of the IRS, a 401 is only as good as the plan documents that govern them.

If you want to be conservative about the rules, only utilize a 401k if you REALLY have claimed self-employment income. Otherwise, you're not really self-employed and the viability of the plan could be scrutinized.

Have a great long holiday weekend.

@Frank M.

I am not certain if I fully understand your first question but I'll try to answer it. Please provide further clarification if you don't see the answer you are looking for.

Self-directed Solo 401k can be funded two ways:

  1. Rollover/Transfer from another qualified retirement account (except Roth IRA). It does not matter how much if the balance of the other account, one thousand $$ or one million $$, you can transfer the entire amount. Multiple accounts can be transferred into the Solo 401k. Example: you have Traditional IRA with Chase, old 401k from the past employer with Citibank and Individual 401k with Fidelity. All of those accounts can be moved into your new Solo 401k without any tax consequences.
  2. You can make contribution of the new funds into your account, however, the contribution amounts will be limited by the amount of self-employment income your earn. So if you have side business that produces minimal income then you can't fully utilize this option.

Our plan documents allow Roth-conversion. So the answer is yes, you can convert portion of your 401k into Roth, pay taxes on the conversion amount and then invest tax-free for the rest of your life.

Hope this helps. Let me know if you have any further questions.

@SenseFinancial - Much thanks, you understood the question just fine and gave me my answer.

Thanks again. As I get closer to actually doing this for my next purchase, I'll take you up on the offer of a quick consult.

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