I believe I have the answer for this but I would surely value some input from this discussion forum. I have a tax client who has an IRA account where the only asset (other than a few thousand dollars cash) is a rental property. When the IRA originally purchased the rental property, the taxpayer used a local bank that was doing a ton of self-directed IRA transactions. They have recently rethought the self-directed IRA option for their clients and are not going to support this type of transaction (although 100% legal) in about 6 months. We do get the required appraisals each year for IRS Form 5498 reporting purposes. Finally, my client turned 70 1/2 during 2014. Here is my question?

Can I have my client quit claim deed a 50% interest in the rental property on 12/31/14 and pick up 1/2 of the FMV as an IRA distribution for the 2014 tax year? We would then follow this up with a quit claim deed of the other 50% interest on 1/1/15 for a 2015 tax year distribution. My client will pick up roughly $100K of income from the distribution during the 2014 tax year and the other $100K during the 2015 tax year.

From my view, we are not engaging in any sort of prohibited transaction as this is simply a distribution out of the IRA to the IRA account holder spread out over 2 years. We want to spread this over two years as the income tax hit from a one-time $200K distribution is a little more tax than my client can handle.

Thanks so much for your answers and thank you (Ed Slott and team) for a great publication.

Bernie