Fair Market Value of Illiquid Real Estate Investment IRA
We are a real estate investment firm primarily involved in the development of lots for single family subdivisions, and constructing houses for new home buyers on these same lots.
We have investors who have provided equity for our ventures. Many of these investors have invested through their IRAs. In years past, our investors who used IRA funds, valued their interests at cost, or simply did not inform their custodian of any changed value from their initial investment cost.
This year, we are told, the reporting of FMV is mandatory. We have had many custodians and investors contact us requesting FMV valuations.
This poses a problem, the subdivisions that are the investments in these IRAs are in the process of being developed. The projects are in phases, the status of permits and platting is partial, some homes are under construction and not sold, some under construction and pre-sold etc. In short, these investments are VERY difficult to value at this point in time. Second, we do not have a appraiser on staff, and given the size and number of subdivisions in question… it would be cost prohibitive to hire an appraiser for these interests (especially since the equity invested by IRA investors pales in comparison to Non-IRA investors… making a sharing of costs unfair).
We are also concerned that if we provide a value internally ; and it is later found to be too low by the IRS, we may have exposure to the taxes and penalties of the taxpayers who are required to take RMDs.
Our apparent choices:
1.) Inform our investors that did so through their IRAs that we can not provide, and are not qualified to provide appraisals of these difficult to value interests. (Then, give them information they need to give to an appraiser they to hire).
2.) Inform the investors that the last known value which was their investment amount is the best indication of what the value is; lacking formal appraisals which are cost prohibitive and such appraisal, if completed would be highly subject to a litany of assumptions about the future
3.) Provide an FMV estimate from our office (and would that be a liquidation estimate, or some discounted cash flow model based on current assumptions in our subdivision model)
Exposure for us under number “3” seems high…as if we are found to be wrong (to low); we fear liability for Penalties and Interest (through our investors).
Is it the ultimate responsibility of the IRA holder to report this FMV? (As you might expect, some of them think is it obvious we should provide the FMV; although our legal agreement with them is we provide tax book value only which is obviously not FMV).
Can someone please advise on possible ways to handle? and a clever way to handle communication of our decision to investors without rocking the boat with them?
Permalink Submitted by Jose Morales on Sat, 2016-03-12 02:12
are you the IRA Custodian? It is the IRA Custodian’s responsibility to report a fair market value. How they go about obtaining that figure isn’t exactly spelled out, but regardless it is mandatory that the IRA Custodian report a fair market value to the IRA holder and the IRS. Their requirements do not necessarily equal a burden on you to provide anything unless there were specific contractual agreements that say otherwise.
Permalink Submitted by David Engel on Mon, 2016-03-14 13:49
I see contradicting information to about whether the IRA customer or custodian is responsible.. It is inpractical from a … cost standpoint … for either the custodian or the IRA holder to provide the value… But here’s what one one Custodian says in a question and answer section: Excerpt from IRA one IRA custodian Website:”Am I able to assign the value to my own assets? No. You must have an independent, neutral person or entity to do so—someone who has no disqualifying relationship with you or your retirement plan. For example, and depending on what assets your IRA holds, an attorney, CPA, or a financial planner could complete FMVs of your assets. If your investments are in real estate, a certified property appraiser, the county tax assessor, or other licensed real estate professional would suffice. For this type of asset, we will accept the annual tax notice so long as the value on the tax bill is a “market” or “just” value.”It seems that the last known traded value (investment amount) or no reporting by the IRA owner at all is the safest route… COMMENTS?????
Permalink Submitted by Joe Luby on Wed, 2016-03-16 19:36
The IRA trustee/custodian has the ultimate responsibility to determine and report the FMV of all IRA assets to both the IRA owner and the IRS. Many IRA trustees/custodians attempt to shift this burden to the IRA owner via contract; but in the end, even if the IRA owner “breaches the contract” by not providing an accurate FMV, the IRA trustee/custodian is not absolved of their reporting duties. The IRA trustee/custodian must still determine and report the proper FMV. You are correct in the statement that can be impractical cost-wise for the IRA trustee/custodian or the IRA owner to obtain accurate FMV of hard-to-value assets. Unfortunately, that is just part of the deal that comes with holding illiquid alternative assets in an IRA. Most IRA owners are unaware of this added expense and administrative issue, and many IRA trustees/custodians neglect to properly report the FMV of such assets. This exposes the IRA trustee/custodian to liability and penaly, and exposes the IRA owner to tax liability for misreported taxable events. The method required to be used to determine FMV for all tax reporting purposes is known as the “willing buyer, willing seller rule” and is embodied and detailed in Rev. Rul. 59-60. Generally, the IRA owners or the IRA trustee/custodian will need to retain the services of a qualified appraiser (as that term is defined in the U.S. Tax Code) and have a proper FMV appraisal performed. The appraiser would request from you, the investment sponsor, the various financial information necessary to conduct the appraisal.