How Can I Take a Distribution of Real Estate Owned by my Self-Directed IRA?
When you take a distribution, you can distribute cash or any IRA asset. This is known as an indirect distribution. The same applies to rollovers from one IRA custodian to another. You can rollover cash or IRA assets, so long as the new IRA custodian will accept that asset category to be held in an IRA.
For example, you have your self-directed IRA account with ABC custodian and own real estate in the self-directed IRA account, but you want to change custodians. You must move the real estate to a new IRA custodian who accepts the real estate as an IRA asset. Most of the traditional banks will not allow your IRA to own real estate because of the lack of financial incentive.
Therefore, if you want to rollover a self-directed IRA account that holds alternative assets, such as real estate, find an IRA custodian who allows an IRA to invest in real estate or the alternative asset in question.
How do you take an in-kind distribution of real estate?
An in-kind real estate distribution pretty much follows the same process as taking a cash distribution, with some minor differences. The first thing you must do is value the real estate asset you will be taking as a distribution. This is especially important if you have a pre-tax individual retirement account. No tax will be imposed on the value of the real estate being taken as a distribution, and no potential 10% early distribution tax. When you get a value for the real estate, you must then complete a distribution request form the IRA custodian and indicate that you will be taking an in-kind distribution of the real estate.
Once the distribution process is complete and submitted to the IRA custodian, you must re-title the real estate from the name of the LLC to your own personal name. You can accomplish this via a title company or a real estate attorney locally.
I have had several clients who wanted to keep the real estate in the LLC who simply drafted an amended LLC Operating Agreement to show that the LLC is now owned by the individual personally. They would then have the IRA custodian acknowledge its removal as member of the LLC. Either way works. The key is to show that the ownership of the real estate has been changed from the IRA to the IRA holder personally.
Just to be clear, the IRA holder will be responsible to pay tax on the fair market value of the real estate or other asset taken as an in-kind distribution. Thus, before one takes a taxable distribution of real estate or another in-kind asset that a self-directed IRA owns, one must be cautious about the tax implications, as well as the 10% early distribution penalty if under 59 1/2.
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The self-directed retirement experts at the IRA Financial Trust can assist you in navigating the self-directed IRA in-kind distribution rules.