RMD on inflated real estate value
Good day Ed Slott & Co.,
I have a situation that I wanted to get clarity on. A client bought a real estate rental property in their Traditional IRA in 2006 or 2007 for $175,000. They did not have it appraised until it was sold in 2011 for $100,000. The client needs to take their second RMD and the value as of 12/31/10 is the same on record as when they purchased it even when the real estate market has declined. Is there a way to petition the IRS to have them change that RMD figure to more accurately reflect real estate values recently? If the home was sold in May, could they use the sale price and have the appraisal backdated to 12/31/10? Otherwise, it looks like the client has to pay almost double RMD than they need to be paying. The custodian is not being very helpful in this situation and we thought that a CPA could contest with the IRS with the right communication.
Your assistance is much appreciated.
Permalink Submitted by Alan Spross on Fri, 2011-06-10 22:33
The RMD rules require the IRA custodian to report fair market value of the IRA at the end of each year. Therefore, the appraisal or lack thereof can only be taken up with the IRA custodian, and a revised 5498 or equivalent statement issued if the value was far enough off. But if this is only the second RMD, that will be less than 4% of the value and about 3,000 more for this particular RMD.
I am surprised the custodian did not address appraisals before since RE values have been dropping for 5 years. I would have the client take this up with the apparent self directed IRA custodian to see if the model they use for reporting year end values broke down somewhere. An appraisal may not be required every year, but there should have been one done in the last couple years. Perhaps the custodian was not following IRS guidelines on providing accurate year end values. In any event, it should be taken up with the custodian, not the IRS.
Permalink Submitted by mk foss on Sat, 2011-06-11 00:23
I agree with Alan that a corrected 5498 is needed to support a reduced RMD.
Custodians that I’ve worked with generally send a letter to the IRA owner asking them to get an annual appraisal but there is no follow up and they continue to use the historic value until they receive another appraisal.
For federal estate tax purposes the IRS will accept the sales price of real estate within 15-18 months after death as proof of value instead of an appraisal. We’re definitely talking apples and oranges in this situation but that information might convince the custodian to report the sale price as the 12/31/10 value.
Permalink Submitted by Bruce Steiner on Sun, 2011-06-12 17:49
It’s relatively easy if there is a sale close to the valuation date and you want to use the value based on the sale. (There was a case, though, where the Tax Court would not accept the sale price of a small block of stock of a corporation close to the valuation date in valuing a large block, saying that the seller of the small block didn’t put as much effort into determining a fair price as would a seller of a large block.)
The more difficult case is where the taxpayer doesn’t want to use the value based on a sale close to the valuation date. Fair market value, of course, means the price at which the property would sell for between a hypothetical seller and a hypothetical buyer, each with knowledge of the relevant facts, and neither under any pressure to buy or sell.
We had one estate where a decedent had purchased assets a few months before he died, and the appraisals came in much lower than the purchase price. We argued that the decedent had overpaid.
We had another estate where several pieces of real estate sold for much more than the appraised value within a year or so after the decedent died. We argued that one buyer overpaid, that another buyer was a strategic buyer (it owned an adjacent property), and that a tenant with a favorable lease unexpectedly vacated the third property.
We had an estate where the owner of an adjacent apartment purchased the decedent’s apartment for substantially more than the appraised value. We argued that the apartment was worth more to the owner of an adjacent apartment than to a hypothetical buyer.
We had a couple of estates where artworks sold for substantially more than the appraised value.
We had one that went the other way. The decedent died a few years ago when the real estate market was (or appeared to be) at a higher point. It took a long time until one of the decedent’s homes was sold, and the sale price was substantially below the appraised value. We argued that the appraisal was too high.
Each of these cases was either settled with the IRS estate tax attorney.
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