Conveying SDIRA Owned Real Estate Back to the Trustee

[FRANK R.]

I am trustee holder for (I own) four rental properties through my SDIRA (Self-Directed IRA). I heard from a tax adviser that a rental property in a SDIRA is a tax shelter within a tax shelter. I thought about it and agree. I am missing out on many end of year tax deductions that I cannot claim because the property is in a SDIRA.

So I want to buy the properties out of the SDIRA, one at a time.  I know I cannot buy them directly because the "self dealing" rules prevents me from buying as a disqualified person. I understand a brother is not disqualified person. Is it legal for him to buy the property from my SDIRA and then I buy it from him?  

[Brian Eastman]

@FRANK R. 

Firstly, while you and your CPA are correct that an IRA does not benefit from deductions on earnings, it does not pay taxes on income in the first place.

Comparing real estate held within an IRA to real estate held personally is like those proverbial apples and oranges. You should be comparing how your IRA performs when invested in real estate with how the IRA performs invested in other assets such as the stock market.

The ONLY way you can ever take ownership of the properties is to have the properties appraised and then take the properties as a taxable distribution.  That tax bill will be significantly larger than a lifetime of the deductions you will then get on the property you would now own personally.

While your IRA could sell the properties to someone who is not a disqualified party (including your brother), you could not then purchase those properties personally. That would be an indirect transaction between the plan and a disqualified party (you) - and is just as prohibited as a direct transaction.  

If you really miss the write offs and cannot stand holding property in your IRA, sell the properties to an unrelated 3rd party and have the IRA carry a note instead. You'll get a good return, with a solid asset underpinning your investment, and you won' t be missing out on any deductions.