distribution of real estate-keogh plan

[Guest Sueor]

My clients have $400,000 real estate in their Keogh. Now it's retirement time. They wanted to distribute the land to themselves next year until I told them the tax consequences. Now they would like to do partial distributions every year; impossible with their real estate. Any ideas or suggestions? I've thought of mortgaging the property for cash flow but then they wouldn't have monies to pay the mortgage payments. Is there any wriggle room for distributing land out of a Keogh? Thanks.

[ljr]

Possibly they could sell some of the real estate to an unrelated party to generate cash for distributions?

Your client is experiencing the result of investing exclusively in illiquid assets which you probably warned them about.

[mbozek]

There are few buyers who will buy a minority interest in RE controlled by a pension plan. Anyway there would be a steep discount on the sale price because of the limited interest being sold. Why not just sell the RE and then roll the proceeds to an IRA?

[ljr]

OOpppss - I assumed there were various parcels of real estate! Sorry.

[Guest jfp]

1. You said "retirement time." Do you mean "MRD" time? If so, point 2, below, probably won't be too helpful. If not, they may have time to consider point 2.

2. If they can raise the cash to purchase the real estate from the Keogh, at full fair market value, it may be worth it to them to file an application with the Department of Labor for a prohibited transaction exemption. Certainly they would have to secure an independent appraisal to satisfy the DOL as to the price; perhaps two or three appraisals. Hiring a knowledgeable ERISA lawyer to prepare and follow-through on a PT exemption application is an expensive proposition, but the cost may be far less than the present value of the tax savings.

[Mary Kay Foss]

It seems to me that a sale of the real estate would be a prohibited transaction. The only way to get rid of it without a PT would be a distribution. I don't see why you couldn't distribute say "an undivided 12% interest" in the parcel.

Of course the employee would have to fork over the 20% withholding. That could be avoided if they could find an IRA custodian that would accept an undivided interest in real estate.

I have a client who is receiving RMDs from an IRA that holds a triple net lease on a piece of real estate. So far, the rents have been enough to make the payments but soon we will have to start distributing the property itself. Fortunately we don't have to worry about withholding from an IRA.