Valuing real estate in retirement plans

Is it permissible to use a county or city tax assessment value for retirement plan purposes.? This would apply to any plan as far as annually reporting plan asset values on a 5500. For a defined benefit plan, it would also affect the minimum and maximum required contribution amounts each year. It would  also be a factor in valuing distributions in kind and be especially important as to whether 415 is complied with for lump sum distributions which include real estate.

I don't know where you are, but in the counties I'm familiar with assessed valuation bears little relationship to fair market value.   The plan assets have to be carried at FMV.  Showing an incorrect value on a 5500 isn't fatal, but yes it will affect the MRC and 404 DB contribution calculations as well as the AFTAP.  And in a pooled DC plan it would affect the value of accounts and distributions (where an incorrect valuation could lead to a qualification failure).   And an incorrect value could lead to a qualification failure in a DB distribution, undervalued could result in a 415 violation, overvalued would lead to a benefit being underpaid.

Fair. Market. Value.

In our experience, we've seen certified real estate third party appraisals, and also seen real estate agents provide "comparables" market value information provided on their letterhead (for whatever that's worth).  But as far as I remember, never used tax assessment.

2 hours ago, shERPA said:

I don't know where you are, but in the counties I'm familiar with assessed valuation bears little relationship to fair market value.   The plan assets have to be carried at FMV.  Showing an incorrect value on a 5500 isn't fatal, but yes it will affect the MRC and 404 DB contribution calculations as well as the AFTAP.  And in a pooled DC plan it would affect the value of accounts and distributions (where an incorrect valuation could lead to a qualification failure).   And an incorrect value could lead to a qualification failure in a DB distribution, undervalued could result in a 415 violation, overvalued would lead to a benefit being underpaid.

Fair. Market. Value.

This.  It needs to be a a third party appraisal, and it needs to be FMV.

Always used an official third party appraisal and never accepted anything else. This is especially important for db plans as any incorrect valuation may result in under contributions or over deductions.

There's no requirement for a third party appraiser.   Some clients are well qualified to value these assets, that's why they invest in them, as they have some expertise.  Residential real estate is often straightforward as there are usually comps available.  I tell clients it depends.  If it's a DB plan, the asset is a relatively small value of the total plan assets and/or the asset valuation is straightforward, and the plan is fairly well funded, it's not really a big deal, the contribution range is so wide, and if the AFTAP is comfortable then not much would be affected if the valuation changes a bit.

OTOH if such an asset is being distributed as part of a DB lump sum, the valuation is of course critical.  And in a pooled DC plan if any distributions are being made the valuation of such assets is critical as it affects all account balances. 

I had clients who were successful real estate agents and their valuation of the real estate was nowhere near what I googled so respectfully bad idea not to get an independent third party appraisal. I did question their appraisal and had them reevaluate and obtain an independent appraisal but that is me. FWIW.

On 1/4/2021 at 10:01 AM, shERPA said:

Some clients are well qualified to value these assets

...but have a built-in conflict of interest, so a third-party appraisal should be required.

However, if you are just the TPA and the plan trustee/named fiduciary wants to do it some other way, just make sure he/she indeminifies you, e.g. has already done so in your service-provider agreement, and make sure he/she takes responsibility for the 1099-R and withholding if not rolled over to an IRA.

48 minutes ago, Luke Bailey said:

...but have a built-in conflict of interest, so a third-party appraisal should be required.

However, if you are just the TPA and the plan trustee/named fiduciary wants to do it some other way, just make sure he/she indeminifies you, e.g. has already done so in your service-provider agreement, and make sure he/she takes responsibility for the 1099-R and withholding if not rolled over to an IRA.

We had one client that used his daughter once, who was a real estate agent in the area.  We told him that there may be conflict of interest concerns, and that he should really get a 3rd party appraisal/opinion.  He subsequently engaged a 3rd party...

14 hours ago, Luke Bailey said:

...but have a built-in conflict of interest, so a third-party appraisal should be required.

However, if you are just the TPA and the plan trustee/named fiduciary wants to do it some other way, just make sure he/she indeminifies you, e.g. has already done so in your service-provider agreement, and make sure he/she takes responsibility for the 1099-R and withholding if not rolled over to an IRA.

Understood, Luke, but conflicts of interest abound in our world, some people abuse this, most don't. 

Maybe a third-party appraisal "should be" required.  But who does this requiring?  The IRS requires FMV, but they don't require a third party appraisal.  And it's clearly not the role of a TPA to require anything.  A TPA could say "get a third party appraisal or we will resign from providing services", but that's about it.  Our job is to advise the client what is required and the consequences of failing to follow the rules.  Sometimes the consequences are significant (plan disqualification, loss of rollover, potential tax penalties), and sometimes the consequences are virtually none.   If a client has an owner-only or self-directed account DC plan and is rolling over a hard-to-value asset to an IRA or another self-directed retirement plan, there really aren't any consequences if the valuation is off somewhat.  And for such assets, FMV is not really a single number carried out to two decimal places.  It's an educated estimate of what the price might be given a willing buyer, a willing seller and current market conditions for an asset with a particular set of characteristics such as risk, return, liquidity, and duration.  

4 hours ago, shERPA said:

Understood, Luke, but conflicts of interest abound in our world, some people abuse this, most don't. 

Maybe a third-party appraisal "should be" required.  But who does this requiring?  The IRS requires FMV, but they don't require a third party appraisal.  And it's clearly not the role of a TPA to require anything.  A TPA could say "get a third party appraisal or we will resign from providing services", but that's about it.  Our job is to advise the client what is required and the consequences of failing to follow the rules.  Sometimes the consequences are significant (plan disqualification, loss of rollover, potential tax penalties), and sometimes the consequences are virtually none.   If a client has an owner-only or self-directed account DC plan and is rolling over a hard-to-value asset to an IRA or another self-directed retirement plan, there really aren't any consequences if the valuation is off somewhat.  And for such assets, FMV is not really a single number carried out to two decimal places.  It's an educated estimate of what the price might be given a willing buyer, a willing seller and current market conditions for an asset with a particular set of characteristics such as risk, return, liquidity, and duration.  

Not necessarily disagreeing, shERPA. I think I actually covered this in my original response to you: