Inheriting a Self-Directed IRA real estate investment
The concept: Purchase rental investment property using self-directed traditional IRA funds.
Q1: Can the property value be depreciated (and hence the IRA value decreased) if it is in an IRA?
Why would I want to do that? Well, I must soon begin taking a Required Minimum Distribution and would take slightly more than the rental income thus resulting in the book value of the IRA being around the depreciated value of the investment property. Upon death the property would pass and must be liquidated/distributed within 10 years.
Q2: Would the value of the inherited IRA be the depreciated value of the property or the market value of the property?
Permalink Submitted by Alan - IRA critic on Sat, 2021-08-28 23:58
Q 1: No, when real property is placed in any tax deferred plan, the depreciation option is forfeited. The IRA value is the actual appraised valuation of the property, and periodic appraisals may be needed to provide the proper year end IRA account value that must be reported by the custodian on Form 5498.
Your RMDs must be based on the above determined year end value of the IRA assets (the property). Upon death a real estate IRA does not necessarily have to be liquidated. If the inherited IRA is subject to the 10 year rule, the property itself can be distributed to the beneficiary as a taxable distribution, after which the beneficiary can start applying annual depreciation since the property would no longer be in an IRA.
Q 2: Market value, and no basis step up at death.
Permalink Submitted by Ron Farris on Sun, 2021-08-29 00:05
Thanks for the informed response. Makes sense from an IRS perspective, too bad from a taxpayer perspective!