IRA all in Real Estate How does he pay RMD?

[Jim Chad]

A tax client of our firm has an IRA that is all one piece of raw land. He is 75 years old and the RMD is about $9,800. How does he get cash in there to pay RMD and $3,200 pr property taxes?

[jpod]

1. RMD question is one which should have been considered before the investment was made. I am guessing that a separate IRA was set up solely to hold the real estate, and that he has other IRA holdings in one or more other IRAs, in which case the RMD can be satisfied from that/those other IRA(s). If not, he has a big problem, and probably no choice but to take a distribution of all the real estate and pay taxes on the full value of the real estate.

2. The real estate taxes are a liability of the IRA holding the real estate. If there is another IRA, the simple answer is to do a trust-to-trust transfer of enough $$ from another IRA to that IRA to pay the taxes. If there is no other IRA, it would appear that the only solution is to take a distribution of the real estate from the IRA and pay taxes on its full value as described in #1, and then pay the real estate taxes out of the individual's non-IRA assets.

[QDROphile]

Ask the genius who created the situation in the first place. The genius was probably counting another IRA or qualified plan of the owner that had lots of liquid assets that could be rolled over from time to time to meet the predictable periodic liquidity lneeds of the IRA. Or the genius knew of an unrelated person who was willing to lease the raw land for use as a wildlife refuge or for future oil exploration or as a firing range.

[Jim Chad]

Presently no other IRA's. He planned on selling the land before this IRA ran out of cash.

[JRN]

With respect to the RMD, why not distribute an undivided interest in the real estate to the Participant. Example: If the market value of the real estate is $500K, and the RMD is $10K, distribute an undivided 2% interest in the real estate to the IRA owner. New deed in the name of the IRA owner -- individually -- as to undivided 2% interest. IRA and IRA owner are now co-investors in the real estate, but co-investment is not in and of itself a PT.

Re how to pay the property taxes -- that one's a little harder.

[jpod]

Paying the RE tax is what blows up this thing. If he personally pays it is either a pt or an impermissible contribution to an IRA.

[mbozek]

With respect to the RMD, why not distribute an undivided interest in the real estate to the Participant. Example: If the market value of the real estate is $500K, and the RMD is $10K, distribute an undivided 2% interest in the real estate to the IRA owner. New deed in the name of the IRA owner -- individually -- as to undivided 2% interest. IRA and IRA owner are now co-investors in the real estate, but co-investment is not in and of itself a PT.

Re how to pay the property taxes -- that one's a little harder.

The problem will exist not just for this year but for all future years MRD and expenses. Best thing is to sell property and reinvest proceeds in more liquid investments such as mutual funds, etfs. Client has to balance reducing asking price on RE value against paying about $5000 in penalty tax every year.

According to MRD RE is valued at about $228k.

[masteff]

Sounds like a foot race between getting the land sold and the local tax assessor taking action. Might call their office to find out their standard time table.

[Belgarath]

Maybe he has time to marry a 35 year old, and reduce his RMD by over 50%. At least that will reduce his penalty until he can get it sold.

[Guest Rajeev]

The RMD can be taken in kind, and as discussed can be distributed by appropriately vesting the property, in the name of the IRA account owner and the IRA (i.e. in the appropriate percentages)

The second part of the question is the payment of the RE property taxes. This would now have to be paid in proportion of ownership, but the point in your question is that there is not adequate funds in the IRA to pay its share?

DOL's PTE 80-26 (as amended) allows for the lending of monies to the IRA from disqualified parties for the purposes of "payment of ordinary operating expenses". Note the original PTE 80-26 did not cover IRA's, the latest amendment does.

You can find this information in the Federal Register at: http://www.federalregister.gov/articles/20...t-free-loans-to

This way the IRA owner (the disqualified party) can lend monies to the IRA (for the exact amount of the RE property taxes owed by its share), and that then can be used to pay the RE property taxes.

Hope this helps...

Rajeev

[Belgarath]

Seems to me that the loan you describe is open-ended - how does this fit within the PT parameters? I believe the PTE is only providing for limited short-term loans. So what would the mechanics be if such a loan is made?

[Guest On Hiatus]

Seems to me that the loan you describe is open-ended - how does this fit within the PT parameters? I believe the PTE is only providing for limited short-term loans. So what would the mechanics be if such a loan is made?

I had another question -- how does paying the property taxes comport with the idea that the loan must be for the "ordinary" operating expenses of the plan. These sorts of expenses -- relating as they do to a sole asset of the plan --- seem not to be "ordinary"

[david rigby]

Ask the genius who created the situation in the first place. The genius was probably counting another IRA or qualified plan of the owner that had lots of liquid assets that could be rolled over from time to time to meet the predictable periodic liquidity lneeds of the IRA. Or the genius knew of an unrelated person who was willing to lease the raw land for use as a wildlife refuge or for future oil exploration or as a firing range.

The "genius" is probably someone who works in real estate, and never heard of RMD.

[mbozek]

The RMD can be taken in kind, and as discussed can be distributed by appropriately vesting the property, in the name of the IRA account owner and the IRA (i.e. in the appropriate percentages)

The second part of the question is the payment of the RE property taxes. This would now have to be paid in proportion of ownership, but the point in your question is that there is not adequate funds in the IRA to pay its share?

DOL's PTE 80-26 (as amended) allows for the lending of monies to the IRA from disqualified parties for the purposes of "payment of ordinary operating expenses". Note the original PTE 80-26 did not cover IRA's, the latest amendment does.

You can find this information in the Federal Register at: http://www.federalregister.gov/articles/20...t-free-loans-to

This way the IRA owner (the disqualified party) can lend monies to the IRA (for the exact amount of the RE property taxes owed by its share), and that then can be used to pay the RE property taxes.

Hope this helps...

Rajeev

I dont understand how 80-26 applies to this situation. Loans are only permitted for 3 business days and the additional exceptions foir Y2K expired as of 12/31/2000.

[masteff]

I dont understand how 80-26 applies to this situation. Loans are only permitted for 3 business days and the additional exceptions foir Y2K expired as of 12/31/2000.

Rajeev should have linked to the most recent amendment to 80-26 which removed the 3 day limit....

http://benefitslink.com/links/20060407-043459.html

http://www.dol.gov/ebsa/regs/fedreg/notices/2006005075.htm

[Guest Rajeev]

mbozek,

From the PTE:

The proceeds of the loan or extension of credit are used only:

(1) For the payment of ordinary operating expenses of the plan, including the payment of benefits in accordance with the terms of the plan and periodic premiums under an insurance or annuity contract; or

(2) For a period of no more than three days, for a purpose incidental to the ordinary operation of the plan;

The "or" was added in the addendum.

Masteff: Thanks for the additional links.

[Guest On Hiatus]

Rajeev:

I do not see how payment of property taxes on an investment that the plan has no possibility of repaying within 60 days qualifies as an "ordinary" operation of the plan. Do you have any additional insight or consideration on this?

My instinct would be to very cautious in this area, or just terminate the IRA and pay the taxes on the (likely depreciated) property. If you are wrong in your analysis, and cause the IRA to engage in a PT, this is what you will have to do anyway.

[Guest Rajeev]

On Hiatus:

I am not sure where you are getting the 60 days from. The PTE 80-26 does not specify the loan period from the disqualified party. Could you please provide us guidance as to where do you see the 60 days?

My discussion was based on the information provided in this discussion. There was no mention about the value of the investment, so either we go through a full analysis (which is the recommended way) or simply provide an option to the requestor so that they as professional can make informed decisions. I do not disagree with your possible assessment, but that information has not been provided by the requester in this discussion.

[Guest On Hiatus]

Per PTE exemption 80-26 (as modified), loans in excess of 60 days duration have to be documented in writing. In other words, an over 60-day loan is going to have a significant audit trail.

[Guest Rajeev]

Great yes... I would say that a loan for even a day should be documented in writing... in my opinion, use of PTE 80-26 is a last ditch effort and should be used carefully and documented thoroughly with clarity on the accountability including but not limited to the reasons why this PTE was activated.... I completely agree with you that the audit trail must be there no matter how long the loan... but just the simple fact that one is using this PTE.