Distributions of Real Property to Disqualified Person

[Guest Pennysaver]

Is there any prohibited transaction issue with the distribution to a disqualified person of real property that is mortgaged? It's not considered a loan between the plan and disqualified person as long as both the real property and its mortgage are distributed, correct?

[ETA Consulting LLC]

On the surface, a distribution to any participant of any property (distributed at fair market value) is not a prohibited transaction. I would, however, take possible exception to the fact that the property has a mortgage on it. I can see instances where that could be construed as a prohibited transaction.

Good Luck!

[Guest Pennysaver]

On the surface, a distribution to any participant of any property (distributed at fair market value) is not a prohibited transaction. I would, however, take possible exception to the fact that the property has a mortgage on it. I can see instances where that could be construed as a prohibited transaction.

Good Luck!

What instances might those be? It doesn't appear to be a sale, either; the IRS classifies as a prohibited transaction the transfer of encumbered property by a disqualified person to a plan where the plan assumes the mortgage. (IRC 4975(f)(3)) It doesn't say anything about the reverse. Plus, is a distribution the equivalent of a transfer?