Worthless investment distributed by custodian now has value

Submitted by Allan Crumes on Fri, 2019-04-26 14:07

I have client that had a promissory note secured by land in their IRA.
The client took possession of the land by default etc.
For over 12 years the land was not able to be sold.
A very large custodian transferred the investment directly to the client with a zero distribution value.
Now there is a buyer for the property.
Would this be treated as 100% capital gain or ordinary income?

Any specific back up such as code sections, regs, or private letter rulings would be most appreciated.

Thanks to all,

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Permalink Submitted by Alan - IRA critic on Fri, 2019-04-26 16:14

If the only IRA distribution from this IRA account was of this note or the land, the value is reported on Form 1099R. If there was no 1099R issued, the value as determined by the IRA custodian was 0. Any in kind asset distributed from an IRA has a basis equal to the value when distributed, and the holding period also starts with the IRA distribution date. Subsequent gain upon sale of the asset is short term if sold within the first year, or LT if sold after one year from the date distributed from the IRA. This is a common situation, although usually it’s a security distributed from a retirement account, not alternative assets. There would be no need for a PLR. This treatment is identical to receiving an IRA distribution in cash and immediately purchasing a capital asset outside the IRA.