Real Estate Valuation

[Guest DTromb]

It has always been my understanding that real property invested in a profit sharing plan must be appraised for its fair market value each year.

We recently received a call from a business owner with a one person profit sharing plan in which he says investments range from stocks, bonds, etc. to some real estate. He said that, per his accountant who has been administering the plan, his investments, including the real estate, were all being valued at cost, rather than the market value.

I've read in other posts that Rev Rul 80-155 specifically calls for the annual valuation at fair market value of plan assets. Is that not still applicable, or is there some mechanism for allowing assets to be valued at cost?

Thanks for any insight!

[SoCalActuary]

You have the unique situation where there is no value in an annual appraisal yet.

No one will have more or less in their account due to a bad appraisal. There is only one person,

and they will get the result of the real estate value when it is sold.

What you must make sure of at time of payout is a proper appraisal, or a liquidation of the asset into cash.

However, there are plenty of opportunities for mischief here, so you should be getting proper

accounting of the real estate transactions in the trust each year. Some investors sneak money out of their

account for fees and expenses, because no one is looking.

[Guest DTromb]

Thank you!

[JanetM]

Rev Rul 80-155 is still good. Seems kind of fishy to me, the assets are required to be reported on 5500EZ using their current value, not cost. The accountant needs to read the instructions to the form. Beginning balance & ending balanceshould incude unrealized gains & losses on line 11a.

[Locust]

Several picky points:

1. The 5500 is filed under penalties of perjury. The form asks for the current value. If the person who signs the 5500 knows a value reported on the form is not the current value, has he or she committed perjury (even if no one has been hurt)?

2. The valuation is made by the trustee. It doesn't have to be done by an independent appraiser, although for any year in which there is a payment, it ought to be. Why doesn't the trustee come up with a current value based on best efforts instead of simply valuing it at book?

3. The IRS/DOL has said that it reviews the asset statement on the 5500 and that if the value of an asset doesn't change from year to year, that is an indication that assets are being carried at book value - a problem it may want to review.

[SoCalActuary]

I don't see the IRS going to the US Attorney for perjury charges in these facts.

I also don't expect the assets to look like they are identical, given the mix of other assets here.

However, I absolutely agree that the trustee and their accountant should follow the rules

for the 5500 filing. You describe a plan where I would expect a 5500-EZ filing, unless you

know of other facts, such as controlled group issues. IRS agents don't show much interest

in one-person profit sharing plan asset valuation, but a lot of interest in transactions, IMHO.