Distributing a Roth with land and debt
Client who is over the income limit for making 2009 Roth contributions and who has debt-encumbered land in his Roth on which mortgage payments have to be made (so has an obvious problem) wants to know how to close out the Roth. We have already dealt with getting the excess 2009 contributions back out so now he is looking at avoiding similar issues in the future. There are no assets in the Roth except the land (and the attached debt.)
Am I correct that if he gets the land appraisal updated to current value, and then gets the land re-titled to his personal name and the note re-assigned to him personally, then the value of the distribution from the Roth will be the difference between the land value and the debt value (which is likely negative at this point)?
Are there any other ramifications to this? He is under the age of 59 1/2 so if by some miracle there is a positive distribution which exceeds his previously-allowed contributions he will have to pay tax on the “earnings”, but other than that, is there anything related to the fact that there is debt on the land that would cause trouble?
Would the Roth end up somehow picking up some UBTI because it is no longer responsible for the debt?
If it matters, there are 2 Roth accounts (his and his wife’s) which own this land jointly and are jointly responsible for the debt. I assume that they intend to close both of them.
Margaret A. Stallworthy CPA
Permalink Submitted by Joseph Arsenault on Mon, 2010-07-19 22:07
I am assuming you mean the Roth IRA has member or shareholder interest in an business entity holding real estate..
Permalink Submitted by Margaret Stallworthy on Mon, 2010-07-19 22:17
I’m guessing that is the case. The client is very confused, but I do know that this thing is set up at Equity Trust and that is the way they usually establish these things. The Roth IRA becomes a member of an LLC and the LLC holds the real estate. Absent any information to the contrary, let’s assume for now that this is true, and that in fact the LLC has 2 members, consisting of his Roth IRA and hers.
So that means in order to close the Roths, they have to distribute the member interests in the LLC to the owners of the Roth IRAs, correct?
Margaret Stallworthy
Permalink Submitted by Joseph Arsenault on Mon, 2010-07-19 22:53
Yes, you would follow the normal steps in dissolving the partnership in the LLC (for the Roth IRA member).
I don’t usually work much with real property in IRAs as I think there are some major downfalls here. But this is my understanding. There are some others on this board they may be able to expound on this more if I have missed something.