Sherwood, OR · Member since 2015 · 34 posts · 11 votes
I've been reading up on using self directed IRA's to finance real estate, and I haven't found an answer to this question. Once you buy a property in a SDIRA is there any way to get that property out of the IRA and still retain ownership? From what I've read you don't have much control over the property in the IRA, so are you essentially stuck with that forever?
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
Kyler, you can not retain ownership of the property owned by your IRA if you sell it. In other words IRS rules don't allow you to sell it to yourself because you are considered Disqualified Person.
When you own property in an IRA you retain 100% control, but there are certain limitations that you need to be aware of. Here is what IRS has to say about it :
If your IRA owns property, you may not use it or benefit from the property in any way.
You can take the property itself as a taxable distribution from the IRA to make it yours. This is generally not tax-favorable as you are taking a large chunk out of the IRA at once and will pay a high rate of tax. If you are under age 59 1/2, there is an additional 10% penalty.
Bottom line is that we strongly recommend against using IRA funds to purchase a house you wish to have personally in teh future. Focus on investing the money and getting good returns.
CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
9y
@Kyler Pace The rules governing prohibited transactions are straightforward and navigable. Tax law has, nevertheless, developed . Self-directed retirement account investing does enable investors to have the cake and it too - but not all at once.
Investor · Salt Lake City, UT · Member since 2016 · 28 posts · 2 votes
6y
@Brian Eastman I was considering withdrawing a property out of a self directed IRA and adding it to my personal portfolio as the cares act removes the penalty for up to $100k. It sounds like you have to do pull the property out all at once, you can't take a percentage.
That being the case, if I bought this property years ago and currently have a non recourse loan, would I be taxed and penalized for the full value of the property if I pulled out of my IRA? Or would I only be taxed for the equity which could be paid over 5 years?
Also, do you have the full tax benefits of investment property restored when it's pulled out of an IRA (depreciation, etc.)? That would be the reason to pull it out; if I were to do it over again I would have pulled the money out of my IRA and purchased it directly.
You can distribute the entire property out, or your could potentially take the portion out which would create number of complications for you down the road. Simpler route would be to distribute the entire property, especially if you can take advantage of the CARES Act.
You will be taxed on the net (current market value minus debt).
Yes, once distributed you should be able to personally take advantage of depreciation.
Unfortunately I found that the IRS doesn't agree recently. They intend to tax me on the full amount ie I'm being taxed on the 100k nonrecourse mortgage portion of the property. I distributed the property in 2020 as a CARES act withdrawal. They're also charging penalties because it's taken them 3 years to decide they disagree. I'm in the process of petitioning to go to tax court after a year of back and forth with them providing supporting documentation.
I'm interested if your opinion has changed over the years or if you have any recommendations? It makes no sense to me; I thought it was straight forward that I should not be taxed on the portion of the property that has debt on it.
Investor · Salt Lake City, UT · Member since 2016 · 28 posts · 2 votes
3y
I distributed a property out of the IRA. It had a ~100k loan attached to it, used to purchase it. The IRS is requiring taxes be paid for the value of the property. They don't care that there's a ~100k loan. ie it appraised at ~200k before distribution with a 100k loan. They are requiring taxes be paid on the appraisal value of ~200k, not the NET (~200k-100k loan = ~100k NET ie what was actually distrubuted because I have to pay the loan still).
Investor · Salt Lake City, UT · Member since 2016 · 28 posts · 2 votes
3y
The 1099R has the full value of the property in box 1 and 2a. It also has 2b checked indicating the taxable amount was not determined.
Multiple letters explained to the IRS that it was not determined because there was a mortgage associated with the property with a balance. The IRS doesn't care and has provided me with a notice of deficiency which I'm petitioning.
The issue is NOT with the IRS! They are taxing you on what was reported to them. The issue is with the IRA custodian not reporting correctly. And it was up to you to make sure that they would take outstanding mortgage into account and reduce the amount in the box 1 by the mortgage balance at the time of the distribution. You should have requested IRA Custodian to amend form 1099R as soon as you received it... I doubt they will help you now although it might be worth trying...
Also as I'm thinking of this I realize that you had to submit a Distribution Form to your IRA Custodian, what did you put in there, did you keep a copy for your records?
Investor · Salt Lake City, UT · Member since 2016 · 28 posts · 2 votes
3y
That was my initial thought when I saw the 1099R as well. The IRA custodian is Udirect. There were a lot of emails around this withdrawal and the reps from Udirect were adamant that the 1099R was correct in having the full property value in 1 and 2a, and the mortgage would be accounted for by 2b.
Maybe someone from Udirect is listening and would like to chime in? Specifically what they told me is this (I kept the email):
How does the mortgage factors into the distribution and tax forms - We simply disburse the property to you personally, with the value stated on the appraisal, we suggest you talk to your tax advisor regarding the tax forms
I have a copy of the distribution form that I signed and they provided, but again I talked to them on the phone and they were clear that 2b accounted for the mortgage.
"mortgage would be accounted for by 2b"? How? Its just a checkbox, there is no place to enter the amount.
Box 2a is "Taxable Amount". Full value of the property that has the mortgage is NOT a taxable amount. You know it, I know it, and they know it. They were making mortgage payments on behalf of your IRA, they could request latest statement, they could request payoff amount, etc. There was an easy way to verify it. The bottom line is this: placing full value of the property in the box 2a is WRONG. Completing both box 2a (taxable amount) and checking box 2b (taxable amount is not determined) contradicts each other. Which one is it? If they are certain that the taxable amount is value of the property then they should complete box 2a and leave box 2b empty. If, as they claimed, they are not sure what the taxable amount is, then they should check box 2b and leave box 2a empty.
That is why your effort to explain this to the IRS failed! Of course they don't care, they have taxable amount reported to them, period. You owe taxes on the taxable amount. I don't think you will make any progress petitioning the IRS. Instead you should go back to your IRA custodian and demand they fix their mistake, issue corrected form 1099R leaving box 2a blank and box 2b checked. Then you can present the corrected form to the IRS with the proof you had the property mortgaged. That is how IRS will determine the taxable amount on this distribution.
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
3y
@Bryce Carroll, the form is completed and signed by you, not them. It looks that you did not complete it correctly and this entire mess began with this incorrectly completed form...
Investor · Salt Lake City, UT · Member since 2016 · 28 posts · 2 votes
3y
The IRA generated the distribution form. Another thing that I assumed I could rely on the IRA's experience and expertise, but it sounds like it wasn't done correctly.
Thanks for all the feedback and passionate/helpful insight; I've reached out to Udirect and I am awaiting their response. Hopefully they can help provide something that will swing things back to fair in the tax court petition..
No, it's not, Bryce. uDirect IRA Services is an administrator, not a custodian. I believe they use American Estate & Trust in Nevada as their custodian. Good luck getting hold of them if uDirect is not responsive, but at least you have another avenue to pursue.
For IRAs, there are custodians and there are administrators. By law, all IRA funds must be held by a custodian. Depending upon whether they are a bank or a trust company, custodians are heavily regulated by the IRS, DOL, possibly the FDIC, State Banking Commissioner, and the Comptroller of the Currency. Administrators are not subject any to such scrutiny and are really just middlemen.
An administrator will pass your funds to a custodian, provide statements, and hopefully help you stay within the law when you invest your IRA funds. Custodians do exactly the same thing but with the added regulatory and financial scrutiny. Why would you place your money with an administrator?
Maybe not perfect, but you can tell if you are dealing with a custodian rather than an administrator because they will usually have the word "Trust" in their name or they will be a bank or brokerage. If it's not clear to you, then ask. And if you think you're having issues, consider what happened to those that placed their IRA funds with American Pension Services, an administrator.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
3y
@Kyler Pace Yes you can get into the weeds as some others have mentioned but basically the intent of the Law is NO you can never take a the property out of your IRA for your personal benefit. This is known as self dealing.
Yes there may be loopholes but do you really want to risk your IRA Based on theory which is clearly against the intent of IRAs?
if you have a self directed IRO you hafe total control of rthe rental prperty. you just can't co mingl the IRA with your personal funds/finances
Investor · Salt Lake City, UT · Member since 2016 · 28 posts · 2 votes
3y
The final answer from Udirect is:
It is not the custodian’s responsibility to determine the taxable amount which is confirmed by the 1099r instructions
I disagree, because the instructions say:
Box 2b. Taxable Amount Not Determined Enter an “X” in this box if you are unable to reasonably obtain the data needed to compute the taxable amount.
The custodian signed the closing docs that included the loan, received and forwarded all the mortgage statements, and paid the mortgage monthly. It seems they have all the data needed, they just have chosen not to. I'm interested to hear opinions on if there's anything I can do given they're refusing to fix it, and it doesn't sound to me like they completed it as instructed, because from the instructions it sounds like it is their job to compute the correct taxable amount?
Also, any suggestions on good self directed IRAs where I could roll the rest of my assets to, from out of the Udirect account?
You can distribute the entire property out, or your could potentially take the portion out which would create number of complications for you down the road. Simpler route would be to distribute the entire property, especially if you can take advantage of the CARES Act.
You will be taxed on the net (current market value minus debt).
Yes, once distributed you should be able to personally take advantage of depreciation.
@Dmitriy Fomichenko I'm working with an IRS appeals officer on this tax court case. The appeals officer said she can't find anywhere it's written down that I should not be taxed for the full property market value ie the debt would be ignored. Do you know of a statute or under what authority I can point her where it is written down that I should be taxed on the net (market value minus debt), not the market value?
It seems obvious that I should not be taxed for money that I didn't make, but the appeals officer disagrees and requires a section in tax code that states this.
I don't have the code to point you to, but the bottom line is the 1099R was incorrect. Somehow you have to force your IRA custodian to correct that; this will solve your problem.
I don't have the code to point you to, but the bottom line is the 1099R was incorrect. Somehow you have to force your IRA custodian to correct that; this will solve your problem.
Hi Dmitriy, unfortunately uDirect has refused, and they have not responded to my last several emails.
More bad news, my appeal was denied and the only path forward is to pay taxes, penalties and fees, or defend myself in tax court.
Is there any chance you can point me to the guidelines your IRA custodian is following when you received the response:
"On this a direct real estate with a liability. We would take the appraised value, Minus the outstanding liability, times the % of the distribution."
I'm looking for anything that I can provide to a federal judge to defend myself in court over this matter. Let me know if you have any recommendations of people knowledgable that may be able to provide details to help mount a defense. Even a statement from the IRA administrator would be a big help if I could present it in court.