Funky transaction

[Gary]

A guy wanted to purchase real estate from himself using pension assets from the plan he sponsored.

Told him PT, no direct sales with interested party and plan.

He then offerred to sell the real estate to a separate party for $1 then to have the plan purchase it for $1, thus avoiding the direct sale.

It does not seem reasonable. Perhaps it would be considered a PT by means of an indirect sale or some other reason.

Curious to hear them.

And finally, if the plan purchased this real estate for $1 then the plan would likely be severely overfunded for the remainder of the plan with surplus assets at termination if the real estate is worth say $500,000 for example, thus an insane high return on investment.

[david rigby]

Funky, no. Idiotic, yes.

What happens if the "separate party" decides not to sell for $1? But that won't happen. Ah, now we see that the separate party is not really separate after all.

[AndyH]

Gary, sell this guy a jumbo 412(i) plan with a "wicked awesome deduction" and run away fast. He deserves it.

[No Name]

Can I bid $2.00.

Seriously, why turn long term capital gains into ordinary income? Lose deductions for property taxes? Lose tax-deferred growth of funds used to pay those taxes?

[Gary]

Even if this transaction did not violate the PTs, which it presumably does via an indirect sale.

If the plan were to purchase it for $1, then clearly the plan would have an immediate investment gain based on the appraised value of this lot and thus lose the opportunity to make future deductible contributions and possibly deal with surplus assets, excise taxes, etc. at plan termination, in addition to eventual ordinary income from the IRA (where a future distribution is rolled) at 70+.

[SoCalActuary]

By discussing the proposed trade with someone who is not his attorney, the conversation becomes discoverable if the IRS prosecutes for tax fraud. He has just described an intent to create the form but not substance of an asset sale to an independent party. Does he understand the problem of form over substance?

If your written guidance warns of the potential problem, and the person does the action, your concern should be your E&O exposure. Resigning from the account may be necessary if the warning is not respected. But, I am not an attorney, so What Do I Know?

[mbozek]

Gary: your client needs to see tax counsel to determine whether there is a taxble gift of 499,999 on the transfer of the property for less than its FMV to the separate party, resulting in the loss of the 1/2 of the client's lifetime gift tax exemption. If the client does not file a gift tax return, the s/l on the transaction never runs out which could cause gift tax to be imposed at death. Separate party may also have a taxable gift but thats another issue. Finally an reversion of surplus plan assets is subject to both income tax and the 50% excise tax on reversion when the plan is terminated which usually eliminates the surplus.

[mwyatt]

Actually, this type of inquiry is indicative of the top of the real estate bubble. Batten down the hatches, and make sure you're not in an ARM or overexposed...