How to handle worthless/illiquid asset within an inherited IRA?

Submitted by Bruce Lowry on Tue, 2023-07-18 16:14

I am an beneficiary of an inherited IRA from my mother, who passed in 2020; IRA must be drained by yr-end 2030. The IRA contains an illiquid ‘alternative investment’ — an apartment complex REIT, which is non-traded and (of course) which suspended shareholder redemptions long ago.

The book value of the REIT shares held in the IRA is approx $16K — but in my opinion, they are essentially worthless and exist on paper only. (I’m even being charged $150 annual fee by the IRA custodian, to continue holding this garbage.) Assuming no possible way to redeem or liquidate the shares now or by yr-end 2030, what will become of them? If I can’t take as a distribution, Is there any way to write off the REIT shares, abandon them, or take as a loss? Thank you in advance for any advice!…



Submitted by Alan - IRA critic on Wed, 2023-07-19 03:11

  • The custodian of this inherited IRA is responsible for determining a year end FMV for this investment, although there is considerable flexibility in how they do this. You would not want to risk a taxable distribution of an investment that may become worthless at any point. You still have 6.5 years before you MUST have this IRA distributed. At anytime you should be able to do an in kind distribution out of the IRA to a taxable brokerage account and the value reported on the 1099R will be your cost basis if distributed in kind. 
  • You cannot take a loss for the valuation loss since this is held in an IRA. You will just have less taxes to pay on the distribution in kind or if the investment is determined to be worthless while still in the IRA.
  • If mother passed after her RBD, you will be responsible for annual RMDs in years 1-9 of the 10 year rule, but the IRS has now waived this requirement for 2021-2023 because they have been unable to finalize the proposed Regs. But you may have to take a distribution in 2024 and perhaps the IRA holds other liquid holdings to satisfy the RMD. If mother passed prior to RBD, you are not subject to annual RMDs, just the 10 year rule.
  • If there are any class action suits pending regarding this investment, it is possible that you might receive a “restorative payment” check made out to the IRA which you could transfer into the inherited IRA. That could be a recovery of sorts, but basically the loss in value just means that you will owe less taxes upon distribution. 

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