Getting out of a Self-Directed IRA
In February 2010, one of my clients arranged a self-directed IRA to purchase a 12-unit apartment complex using funds from an existing IRA at a brokerage firm. Now, they would like to assume full ownership of this property (with a new mortgage) so that they can have the benefit of related tax deductions for depreciation and expenses. The client just turned 59 ½.
What they’d now like to do is take the money out of the existing self-directed IRA and move it to a new IRA in a more traditional investment vehicle (for example, mutual funds). Are they able to directly transfer the funds from one IRA to another? I would think that [i]at the very least[/i] he could take a full distribution and then reinvest the funds within 60 days to avoid it being classified as a distribution. Or is there some little-known quirk of the self-directed IRA/real estate investment tax laws that I’m completely unaware of?
Paul E.
League City, TX
Permalink Submitted by Alan Spross on Thu, 2012-11-01 23:37
It may not be possible to do this without a taxable distribution. But if the IRA sells the property to another party, the cash can be rolled over to a mutual fund IRA and client purchases another property with other funds. The costs of sale within the IRA would deplete IRA funds.
If the property is distributed out of the IRA, the client CANNOT keep the property and substitute cash to complete an IRA rollover. To complete an IRA to IRA rollover, the SAME property that was distributed must be contributed as the rollover contribution, so that eliminates another option.
Client should discuss this intent with the IRA custodian to determine if they have a suggestion that meets IRS requirements without running afoul of IRS rules.
Permalink Submitted by Bruce Steiner on Sun, 2012-11-04 03:03
It may be possible to obtain a prohibited transaction exemption from the Department of Labor which would allow the IRA owner to purchase the property from the IRA.