Proving that I lost my shirt!
Hi Everyone,
I made a loan from my Sep IRA to a foreign company building a real estate project.
I came away with a lovely profit that first year.
I jumped at the chance to repeat the loan the next year and as you might have already suspected, things did not go as smoothly… sales dried up and my loan is not fully repaid.
The company is NOT bankrupt and still exists BUT with just a few dollars in their coffers it is insolvent. The Director left the company (though I am still in touch with him when needed) but other than a ton of e-mails back and forth between myself and many upset shareholders
and lot owners, there is little to show that the project is now basically defunct.
The Director cannot quit the post until someone replace him, a job that no one is willing to take on: to, absolutely nothing is going on though, one “surviving” lot owner is trying to keep things alive in some fashion. No building is happening and monies are not forthcoming.
My collateral of property in the form of “lots” proved to be an expensive challenge to acquire both legally and financially as getting this possibly worthless property in a far away country (that does not even recognize IRA’s) would mean transfer costs,forming an LLC to hold the property in, plus yearly taxes. No way….
All told, there comes a time to write off a bad investment and call it a day.
My custodian is asking when this loan will be repaid as it is now overdue and they will not accept that I don’t have much in the way of documents to show that the company is not and will not repay me.
They have suggested I find outside council for the matter.
I want to write this off in a correct way so as to satisfy the custodian and of course to insure I never have an issue. Suggestions?
thanks,
Harry
Permalink Submitted by Alan - IRA critic on Fri, 2014-02-14 20:50
The custodian has a legal obligation to determine the fair market value of your IRA as of the end of every year and report it on Form 5498 to you and the IRS. Other than cooperating with them to the full extent, the problem is one they assumed by becoming a self directed IRA custodian. As for the IRA, if it is a traditional IRA the IRS will suffer part of your loss because the balance in the IRA that will be taxable when you take RMDs is reduced. There is nothing for you to actively write off as you never paid taxes on the SEP IRA contributions in the first place, you just have a much reduced IRA value.
Permalink Submitted by Harry Stevens on Sun, 2014-02-16 17:51
Thanks for your reply. The Custodian has been reporting the full value of this as if it’s been paid.My understanding is that I need to report the value every year; something I have not done.Should I send them a letter with the valuation minus this unpaid amount?
Permalink Submitted by Alan - IRA critic on Mon, 2014-02-17 00:58
This is copied from the site of a self directed IRA custodian:
Permalink Submitted by Harry Stevens on Mon, 2014-02-17 22:22
Thanks for this quote Alan.In this case I think I will have to work on finding an independent third party who will be able to confirm that the note is in default. Not sure what type of person this would be in South America.. An independent lawyer perhaps ?I can get a note from the Director but I think that’s not quite filling the bill on the “independent aspect..but it might be good to have as well anyway. I welcome your input….I was told that there are some smart people answering questions here and I am delighted to have your input. thanks again. Harry
Permalink Submitted by Joe Luby on Tue, 2014-02-18 17:24
Just a bit of clarification on the subject of FMV of notes and mortgages. The quote from the self-directed IRA custodian shown above is a bit misleading and quite self-serving on their part. The FMV of a particular note may be the same as its outstanding principal balance but more often than not it will be something different. It is common for IRA trustees to use the outstanding balance when reporting FMV as a convenient and inexpensive-to-obtain valuation. However, this practice does not account for market realities such as the interest rate and terms of the note, paying history of the debtor, quality of security interests if any exist, etc. In most cases the FMV will be entirely different from the outstanding principal balance regardless of the fact that the IRA trustee may erroneously report said balance as the purported FMV. A simple comparison makes this concept very clear: imagine if an IRA trustee always reported the face value of a widely traded bond (government, municipal, or corporate) as its FMV. This would be clearly incorrect. For example, a bond with a face value (outstanding principal balance) of $10,000 may currently be trading for much less or much more than $10,000 depending on all of the above described factors including the current interest rate environment. Reporting the FMV of such a bond as $10,000 at all times would result in either over or under reporting of the FMV of the bond and would potentially cause harm to the IRA client in the form of higher or lower than required tax reporting.
Permalink Submitted by Harry Stevens on Wed, 2014-02-19 00:25
Very well said and thanks for your input..I am not sure what to do on this other than send them an e-mail now that the loan is worthless and that I am working on getting backup. Seems I may have an accountant at the lawyer firm that did the audit who can attest to the insolvency ot the company.I think that along with a note from the Director who has left the country is about what I can give them..Stay tuned, I’ll unload my other South American mess up in a moment or two..really a doozy.Truly, sometimes I wonder what I was thinking.Harry or if i was really thinking at all.