Self Directed Conversions and "Adjusted Valuation" -Is This Real?

[Daniel Dietz]

(cross posted in SDRIA Forum also)

Hello All,

We have been investing with both SRIRAs and SOLO 401Ks for quite a few years now and are looking to do more, and have a few potential deals in the pipeline. I have read up on the concept/method of also using "Adjusted Valuations" when converting Traditionals to ROTHs,  and am very intrigued. Seems too good to be true, but there seems to be a lot of supporting evidence that it can work too. I first read about it in this book https://www.amazon.com/Keep-Ad... which seems to have a lot of 'case references in it.

For those not familiar with the concept the general idea is that you would have a specialized appraiser appraise your investment, which could be say a rental house, or in our case shares of an LLC that owns rental houses, and come up with a 'reduced valuation' due to ill-liquidity being real estate (vs say cash, stocks etc...) or 'minority control' in the case of an LLC (ours are 33% each). The examples in the book and elsewhere seem to vary from 15% to 35%.

An example of the concept would be your 3 way SDIRA LLC buys a rental for say 300K with 60k down and the balance of 240K on a non-recourse land contract with the seller. You then have in appraised with a 'reduced valuation of say 20% on each share being worth only 80K instead of 100K due to those shares not having majority (decision making) rights. Since each share is worth 80K but also has 80K in debt, the 'book value' is essentially $0.  So now you convert over from Traditional to ROTH and since the value is $0 you pay no 'roll over taxes'. Obviously this would be more advantageous in a 'leveraged account'

My questions for any of the experts or others out there who have used this method are;

1) Have you had clients that do this (or yourself) and does it work as straight forward as it sounds?

2) Is there any advantage to doing it in a SDIRA vs SOLO401K all other things being equal?

3) I assume there is no such things as a 'negative value' that a person could use as a tax deduction?

4) Is there any DIS-advantage to doing this strategy in general?

Thanks, Dan Dietz