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I have a house purchased with a self-directed IRA. Would

I have a house purchased...
I have a house purchased with a self-directed IRA.

Would it be possible for me to take a 50% distribution of that house this year and then a 50% distribution next year?

Thanks!

Don
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Answered in 23 minutes by:
11/10/2012
Bill
Bill, Enrolled Agent
Category: Tax
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Bill :

It might be possible if the IRA custodian was willing to change the title to joint ownership with the IRA as 50% owner and yourself as the other 50% owner. However, this could be considered a prohibited transaction as it would be an exchange between yourself and the IRA. It could also result in other issues as 50% of the expenses (property taxes, repairs, etc) would have to be paid by the IRA and 50% by yourself. Also, 50% of the fair market value would be reported as a taxable distribution to you.

Bill
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Customer reply replied 5 years ago

You're welcome...


Would it be better to take a 49% distribution in December of 2012 and then a 51% distribution in January of 2013?


 


Don

Since tax rates are scheduled to increase next year, it makes sense to spread the income over 2 years. Even if legislators decide to postpone the increases to a later year, it makes sense if the distribution value amount is large as it may push you into a higher tax bracket.

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Customer reply replied 5 years ago

Yes...a full distribution would put us about $250k, but a 49% this year and 51% distribution next year would not.


Would the 49% distribution this year keep it from being a prohibited distribution (by keeping it below the 50% ownership threshold by a disqualified person)?


 


Thanks!


 


Don

Are there any other investments inside of the IRA?

Was the house a rental property that you rented to a nonfamily member?

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Customer reply replied 5 years ago

There is one four-plex and one other home in the IRA.


The home in question was planned to be a vaction rental but it was never rented to anyone.


 


We were thinking of moving into the house ourselves (as our primary residence) and would be willing to pay the taxes on the distribution but we were just looking for the best way of doing this.


 


Thanks!


 


Don

The 50% test would not apply because you are already a disqualified person as the IRA owner. The reason I was asking about any other investments is because if a transaction is deemed a prohibited transaction then all assets held in the IRA become immediately taxable.

The fact that it was not a prohibited transaction when it was purchased nor did it become one while held in the IRA is positive, as the argument could be made that the only alternative to make a distribution would be to sell the house and distribute cash which would be onerous and unreasonable. Perhaps the current IRA trustee has experience with this as they must specialize in alternative IRA investments if they permitted this type of investment. If not, then the safest approach would be to consult with an experienced ERISA attorney.

http://www.irafinancialgroup.com/prohibitedtransactions.php

Bill
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