Valuation of Self Directed Real Estate IRA for Roth conversi
Situation: Real Estate (rental) is 61% in IRA self directed
39% of Real Estate is not in the IRA
Real Estate produces 1500.00 monthly rent, 61% of rent flows into self directed IRA cash money account every month
IRA owner wants to convert the self directed IRA to a Roth
Property appraised at 93,000 on January 12, 2010, purchase price was 123,000 two years ago.
For purpose of Roth conversion, does the rental income add anything to the valuation or is it just the appraised value?
Also, due to the fact that the only 61% of the property is in the IRA, is the current appraised valued discounted by more than 39%?
I express my gratitude to those more knowledgeable than I who can shed some insight on this situation.
Keith James
Permalink Submitted by Marvin Rotenberg on Tue, 2010-02-09 20:56
If you were converting now the $93,000. value of the real estate would be used. You may at some point have to substantiate the apppraisal. The rental income is considered income to the IRA.
Marvin
Permalink Submitted by Keith James on Tue, 2010-02-09 21:32
Marvin,
I am not sure you addressed the fact that only 61% of the real estate is in the self directed IRA.
Why should the full valuation of the RE be used if only 61% is a traditional IRA?
Regards,
Keith James
Permalink Submitted by mk foss on Wed, 2010-02-10 18:09
I am a little confused by this.
It seems that the IRA holds a fractional interest in real estate plus accumulated income from that real estate. The valuation for a Roth conversion would be the FMV of the real estate plus any cash or other investments in the account – unless the IRA owner intended to just convert the real estate and not the other IRA investments. You’d need a contemporaneous value for the real estate – the appraiser may have a reduced value because less than 100% of the property is included.
Some custodians require the IRA owner to obtain an annual appraisal of real estate in a self directed IRA – but that value should be for the real estate owned, not 100% of the value.
Permalink Submitted by Alan Spross on Thu, 2010-02-11 00:13
Not only that, but there used to be more than one recognized appraised value for commercial real estate, one of which recognized the occupancy status, monthly rents and the term of any lease. Since the real estate meltdown, many procedures are being rewritten to avoid the possibility of bogus valuations on which prior loans were based. 61% of the cost of any appraisal here needs to be paid by the IRA and not by outside funds or you have a contribution, probably an excess contribution to the IRA, if not worse.
It would be interesting to see if the IRA custodian will attempt to apply their own appraisal requirements here.
Permalink Submitted by Bruce Steiner on Thu, 2010-02-11 00:32
Treas. Reg. § 20.2031-1(b) defines fair market value as follows:
“The fair market value is the price at which the property would change hands between a willing
buyer and a willing seller, neither being under any compulsion to buy or
to sell and both having reasonable knowledge of relevant facts.”
In other words, you take into account all of the facts and circumstances.