Anyone have experience with this? I'm a financial planner that generally advises against SD IRA's to hold real estate when the client can purchase directly in their own names. But I've just had a client that came to me with one, and I'm wondering if there's an efficient way to remove the property from the IRA.

@William Walsh

Yes if it is processed as is an in-kind distribution. 

I would not exactly call it efficient because  taxes, and a 10 percent early distribution penalty will apply if the account holder is under age 59 1/2. 

When real estate is distributed from an IRA to the IRA account holder, the property is assigned in the IRA holder's name, but before that can be done, the IRA custodian will need to know the fair market value (FMV) of the property so that the correct amount of taxes is paid on the distribution.

Unfortunately the RA participant cannot purchase the property from the IRA as this would result in a prohibited transaction. This would violate the following prohibited transaction specifically:

“Sale, exchange, or leasing of property between a plan and a disqualified person.”

https://www.irs.gov/retirement-plans/plan-particip...

What is more, this same rule applies to round-about/straw-man transactions. For example, you cannot have your IRA sale the property to a third-party and you then turn around and buy it from that third-party.

William, are you talking about taking property out via "in-kind distribution" or you simply wish to sell the property and reinvest into conventional investment?

@George Blower - Thanks very much for this explanation. Very clear and helpful. I was afraid this might be the case, but held out hope there might be a way to purchase the house and put cash back into the IRA. The client is 59.5, but it seems once the property goes in, the only way it's coming back out is in the form of a taxable distribution. @Dmitriy Fomichenko , as I state, my hope was that there might be a way for the client to sell the property out of the IRA to herself, and "refill" the IRA with cash to avoid a taxable distribution.

William, 

selling property from an IRA to self would be considered prohibited transaction, can't do that!

Thank you Dmitriy!

It was purchased with pre-tax dollars. If the IRA sold it (to a non-disqualified person) then the proceeds would go back into the IRA. Then, when the cash was distributed, the distribution would be taxable. Assets distributed from an IRA to the IRA holder are going to be taxed. No way around that.

I agree with everyone on here, no way to transfer the property out of the IRA and retain an interest without triggering a distribution.

Structuring a workaround would likely be considered tax evasion.

Everyone covered it. Definitely a lack of planning. They should look at selling it while it is in the account. If it is a ROTH IRA we can have an entirely different conversation.