Exit Strategy for IRA Owned Property?

Question

A few years ago, I went self-directed on my IRA and purchased investment property with it. So far so good. But, what can I expect when I reach retirement age? Will the IRS want to review my records, purchase history, rents, bank account?  What is the process like for exiting this situation?

Carl Fischer · Answer

@Karen Lee

There are no taxes if it is a Roth SDIRA. If not, think about converting to a Roth incrementally or all now while taxes are low. No RMDs for Roth IRAs.

George Blower · Answer

@Karen Lee

1. Option 1: Once you reach retirement age, you can sell the property to an unrelated person and then withdraw the cash as you need it and pay taxes on the withdrawn amount (subject to the required minimum distribution requirements once you are 70.5).

2. Option 2: Once you reach retirement age, take an in-kind distribution of the property which would require paying taxes on the full fair market value of the property at the time you reach retirement age (which taxes would have to be paid with other funds).

Karen Lee · Answer

Thank you George. Can you tell me what you mean by an "in-kind" distribution in option 2? If you mean I could sell it off, which taxes are you referring to that would be required? Capital gains?

George Blower · Answer

Please see the following additional considerations regarding taking the property as an "in-kind distribution":

1. In-kind transfer means the title is transferred from the IRA to you personally.

2. From a tax perspective, this means that you are responsible for paying income tax (not capital gains tax) on the full value in one lump sum.  For example, if the property is worth $100,000 it would be as if you took cash in the amount of $100,000 out of your IRA (which would require that you report an additional $100,000 of income and pay the corresponding taxes).

3.  While it is theoretically possible to simply withdraw/transfer only a certain percentage ownership of the property (e.g. 20% one year, 20% the next year etc) to spread out the tax burden, this means that you would own the property as a tenancy in common.  In that case, the title would need to reflect your personal ownership interest as well as the ownership interest held by your IRA.   Moreover, going forward all of the income and expenses must split in accordance with the ownership percentages.

4.  Once you own the property 100% in your name, you can use it for personal use, work on the property, etc.

William W. Humphrey · Answer

If you choose an in-kind distribution, you can spread that tax burden out over a number of years.  It is essentially a titling exercise in which you distribute a percentage of ownership each year or whenever you choose.   For example, in one year, you decide to distribute 20% (which means that the tax event is based on 20% of the value).  When the titling on the property changes at the time of distribution, the ownership would be 80% IRA owned and 20% personally owned.  Of course, the revenue of the 20% now needs to be handled on your personal tax filing.  Then the next year, let's say you decide to distribute another 30% of the property.  The titling would then reflect 50% IRA ownership and 50% personal ownership.  And so on.

Brian Eastman · Answer

@Karen Lee

Other than the fact that real estate tends to be a larger, less liquid asset, how it behaves in a retirement plan is exactly the same as conventional financial products.  As you invest, the income generated it not taxed, allowing you to grow your savings more significantly over time.

Starting at age 59 1/2, you have the option to start taking distributions from the account.  Anything you take out will now be viewed as taxable.

Some investors continue to hold a property and take distributions from the cash flow.  This is nice, because you do not need to diminish the principal asset in order to draw income.

If you simply sell the property within the IRA, that is a non-event.  The IRA has traded an investment in real property for an investment in cash and there are no tax implications.  You can reinvest the cash in something else, take a distribution to yourself, or some combination of the two.

You could distribute the property to yourself in-kind, meaning transferring title from the IRA to yourself.  The current appraised value of the property would be a taxable event to you, so that generally does not make a lot of sense.

Exit Strategy for IRA Owned Property?

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