Doc investing in real estate; appraisal/5500 question

[jmartin]

Posted in two other forums here. Wasn't sure best place to put it. Sorry. A doc has joined a gastroenterology practice. the plan doc allows for investments in real estate. More specifically the do wants to invest in the shares of the endoscopy center part of the gastroenterology practice. This leads to a couple questions.

- Since the plan is a small plan (SF), does the 5500 require an appraisal?

- If yes can the appraisal be done by the accountant?

- If an appraisal is needed, is it every year?

- If the practice does not have a formal appraisal done every year would a CPA or managing partner letter work?

[My 2 cents]

When you say "doc", do you mean "plan document" or "the medical doctor who joined the gastroenterology practice"?

I may be wrong, but to the extent an appraisal is required, I would expect that it would have to be performed by someone both expert in the valuation of real estate and totally independent of the plan sponsor. I would not think that an "appraisal" done by an accountant (engaged by the sponsor) or a managing partner would suffice.

[jmartin]

Sorry I meant the doctor joining the practice. Sounds like an independent appraisal is needed. What if the doctor uses his own accountant who is not affiliated (assuming they are an expert in real estate,etc)?

Is there a spot on the 5500 for this? didn't think there was on the SF but wasn't sure.

[mbozek]

Need have appraisal by someone who is qualified to do appraisal in that type of asset. E.g., qualified real estate appraiser must be used for RE. Same standards apply as for an appraisal to value a gift or inheritance reported for tax purposes.

Second, need to retain counsel to make sure that investment is not a prohibited transaction. See Flaherty's Arden bowl v. IRS, 271 F3 763 which can be googled to see what happens if there is a PT in a qualified plan.

[Kevin C]

Your description sounds like he wants to use his account to purchase stock of the plan sponsor. Does the plan allow that? Who would the stock be purchased from? How would the purchase price be determined? I can see some possible PT issues.

As for the 5500 filing, a plan that holds non-publicly traded securities or employer securities cannot file Form 5500-SF. The SF filing is only available for small plans that are 100% invested in assets with a readily determinable market value and do not hold employer securities. Non-publicly traded assets can also affect whether or not the plan qualifies for the small plan audit waiver.

[ESOP Guy]

The 5500 the plan files is irrelevant to this question. The trustee is obligated to have a reasonably value the assets as of every allocation period. So the trustee has to be able to show the value they are using is a good value and obtained via a reasonable method.

If a distribution is needed to be made obviously a good value is important. Likewise when it come time to pay an RMD a good value is important.

I agree it isn't clear if he is buying real estate of shares into a company that owns real estate. It matters a lot.

If it is shares what kind of shares are they? If they are shares in a C corp it MIGHT be ok to do this. But if it is an S Corp then only an ESOP can own those shares.

If it is an LLC or partnership that has pass through income then it raises questions about Unrelated Business Income tax. There might not be any but I can't say that for sure.

I think you are looking at an issue that can get bad and complex fast.