Getting a property out of a Self Directed IRA

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?

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Joshua Massari

Rental Property Investor · Costa Mesa, CA · Member since 2015 · 53 posts · 23 votes

Ask @Brian Eastman

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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
2y
@Bryce Carroll,
Sorry to hear about this, and very disappointing that your IRA Administrator screwed you up like this. It's just common sense; they did not issue 1099 correctly. You should get a tax attorney to help you further.
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
2y
Kyler Pace
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Kaaren HallBusiness Member
Financial Advisor · Irvine, CA · Member since 2011 · 113 posts · 63 votes
2y
Kyler - If you wish to personally own a property your self-directed account owns, you need to withdraw the property from the IRA. To do this, you would first obtain an appraisal. Submit that appraisal to your custodian and request the non-cash withdrawal. The custodian will re-title the asset to your personal name and you would then receive a 1099 for the appraised value of the home.
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
2y
@Kaaren Hall, thank you for joining the discussion; you are the right person to offer some real help here. To understand the background, you should go back to page 1 and read the entire thread.

But here is what happened in a nutshell:

@Bryce Carroll is a client of uDirect. In 2020, he distributed real property from his IRA, which had a mortgage. He received a 1099R from uDirect reporting the full value of the property in box 2a (Taxable amount), which is incorrect. Since there was a mortgage on the property, the taxable amount should be the property's value minus the mortgage. He is now being taxed on the extra ~$100K which he did not receive.
Can you help the guy and do the right thing by correcting 1099R?

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Kaaren HallBusiness Member
Financial Advisor · Irvine, CA · Member since 2011 · 113 posts · 63 votes
2y
Bryce- I am the CEO of uDirect IRA Services. I'm sorry to learn of the difficulty you have faced.

Our custodian is American Estate and Trust and not APS (American Pension Services). APS went out of business years ago.

A property has a value regardless of what is owed. If you have no mortgage the value would have been the same. It is not the value plus the mortgage. No property value is ever calculated that way.

The information for box 2b was taken directly from the 1099-R codes. If you buy a property for $100,000 and take a loan for $50,000, the value of the property is not $150,000 it is still worth $100,000.

Your property's value was $154,900 at the time of acquisition. You took on a loan of $100,685. AET reflected correctly the value of the property, minus the non-recourse note. The value is not the taxable amount minus the mortgage. The same would be true on your private home.

You provided an appraisal for $174,000. That was the property's actual value and it is that value that was correctly reported to the IRS.

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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
2y
@Kaaren Hall,
If the property value is $174,000 at the time of distribution and there is a loan on the property of $100,000 then what would be the taxable amount?
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
2y
@Dmitriy Fomichenko sorry jumping into this a month later, but since when does a loan amount affect either the VALUE of a property or its TAXABLE amount?
Is this a self directed thing?
Hasnt taxable amount always been sales price less cost basis? Cost basis is roughly purchase price plus closing costs. You can refi all you want and it doesn’t change the cost basis
Hasn’t value of the property just been the value? The equity in the property. May change with a loan, but not the value.
Did I miss how these terms are calculated differently for self direct accounts? Thanks
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
2y
@David M.
Yes, you missed it. Read from the beginning; the conversation here is not about the property value but about the taxable amount.
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
2y
@Dmitriy Fomichenko
I read it over. So, why is the taxable amount include the loan amount? Why is a self-directed account so different that the financing adjusts the taxable amount?
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
2y
@David M.

I think you are still missing the point, David. The taxable amount should not include the loan amount because when you take property with a loan on it as a distribution from an IRA, the loan balance is not your money (you owe it to the lender).

Here are two examples to help you understand this:

1. You have a Traditional IRA with a $100,000 balance. You take a 100% distribution from this IRA. What is the taxable amount?

2. You have the same Traditional IRA with a $100,000 balance. You use it to buy investment property for $500,000. To do so, you used the balance of your IRA, $100,000, to put as a down payment on this purchase and obtained a loan for $400,000. The next day, you take the property out from an IRA as a distribution, which is a taxable event. The property's value did not change; it is still $500,000, and the loan balance did not change; it is still $400,000 (hint: the value of the IRA remains the same: $100,000 = $500,000 property minus $400,000 loan)

What is the taxable amount, $100,000 or $500,000?

If you need clarification - call me.

To avoid confusion, simply provide the dollar amounts for 1 and 2 in your response.
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
2y
@Dmitriy Fomichenko
No, we are on the same topic. #1 I asssume you are going with $100k (and assuming there are no post tax contributions gobly gook). I just disagree with your assessment of #2. The value of the IRA might be $400k, but you are taking a $500k property out. So your tax liability is $500k. Whether you satisfied the lien doesn't matter.
Lots of examples come to mind. If we stay on real estate, if you purchase a property for $500k, but use $100k of loans, the property is still worth $500k. If you looked at a balance sheet for the property, there is $400k of equity --- of course. But, accounting for tax purposes, that I've done anyway, doesn't care about equity, it cares about sales / proceeds and adjusted cost basis. Your logic just looks to me like many investors who thinks their capital gains tax has something to do with the amount of loan on the property.
That's why I asked: why for a self-directed account does the accounting methodology change?
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