RMD From a Private Repriced REIT in an IRA
I have a private non traded REIT, Inland Western (IW) in my IRA which changed their share price last year from $10 to $8.50 due to dropping of commercial property values. I am 70 1/2 this year and although I may defer this years RMD, it may be an advantage to do the RMD. Assume I have 1000 shares as of last Dec 31st. My RMD distribution period is 27.4 so $8,500 / 27.4 = $310, and $310 / $8.50 = 37 shares. Because IW is a private non -traded REIT, I would call them and ask to recharacterise 37 shares out of the IRA and they would send the 1099R to the IRS for $310 which I pay income tax on, and I would have 37 shares in a new non qualified account.
However, in this case, if I asked IW to recharacterise the whole account ($8500), they would send the 1099R to the IRS for $8500 and I pay tax on $8500 income and they put 1000 shares in a non qualified account.
Subsequently, assume the IW properties recover value and the shares are assigned the $10.00 value again … my basis is still $8.50. If there is a future liquidity event (IPO), or after a year I redeem the shares with the company at $10/share, I would have a capital gain of $1500, long term from the recharacterization date to the redemption date.
Is this correct? If so, the more of IW I recharacterise from my IRA account to a non qualified account now, the more income I convert from income rates, to lower LT cap gain rates … right?? This should be advantageous especially if Obama raises cap gain rates in the future . I guess the downside is that I no longer defer the tax on the dividend, whether it is taken in cash or reinvested, after the shares are recharacterised to a non qualified account.
Comments? TEU, Bloomfield Hills, MI
Permalink Submitted by Alan Spross on Mon, 2009-09-14 00:12
The transaction you refer to would be a distribution of shares, not a recharacterization. You would have to work with your IRA custodian to process the distribution of shares from your IRA, and the custodian also issues the 1099R with the value of the shares on the distribution date.
It is true that any gain on the shares are determined by increases in the share price after distribution, and the holding period also begins at that time for purposes of reaching the LT holding period of 1 year plus. The trade off is gains outside the IRA taxed at a lower rate vrs having any gains in your IRA where they are deferred, but eventually will be taxed at full ordinary income rates. REITs are also ideal for IRA accounts because the dividends are taxable at the full ordinary income tax rate on shares held in taxable accounts. In that sense a REIT or bonds are better suited for an IRA than common stocks which issue qualified dividends outside the IRA taxed at the LT gain rate.
That said, your RMD for 2009 has been waived by WRERA, signed by Bush on 12/23/08. Therefore, 2010 will be your first RMD year under current law and that means that your first RMD can be taken as late as 12/31/2010. Of course, you can distribute the REIT shares as part of your RMD or just as a discretionery distribution if you wish.