When an IRA account holder reaches 72 years of age, they have to start taking an annual RMD – Required Minimum Distribution. For most retirement accounts taking a RMD is simple. The retirement account is stocked with assets (like stocks) that can be easily liquidated and the cash withdrawn. In a Real Estate IRA the process can be a little more complicated. Property doesn’t always lend itself to easy liquidation, especially if the account holder doesn’t want to liquidate the property all at once. That being said, there are a number of options available to those needing to take a RMD from a Real Estate IRA. Here is a breakdown of the four most popular processes.
How To Take a Real Estate IRA RMD With an In-Kind Distribution
An in-kind distribution allows an account holder to make a distribution in a Real Estate IRA by transferring a percentage of the property’s ownership. In effect, the property itself is portioned out and becomes the distribution. Here’s how it works:
- The account holder determines the amount of the RMD. This can be done by using an IRS RMD worksheet, or you can just ask your accountant.
- Once you know the amount of your RMD, you can start the in-kind process. The first step is to have the property receive an official appraisal. This is required by law, and it will also let you know what percentage of the property needs to be distributed.
- Draft a Quit Claim deed that transfers the requisite percentage of the property from the Real Estate IRA (or IRA LLC) to you, the account holder. This means that the ownership of the property will now be divided between you personally and the IRA. From this point forward all property expenses and income will be split according to this percentage.
How to Pay Taxes On An In-Kind RMD
Once the distribution from the Real Estate IRA has been taken, the Custodian will report the in-kind distribution on a 1099R form. The value of the distribution will be calculated by taking the percentage distributed and multiplying it by the appraised value. For instance, if the account holder distributes 10% of a property appraised at $100,000, the Custodian would report that a $10,000 distribution occurred. As with any distribution, this amount would then be subject to tax. The documentation necessary for this process can vary between Custodians. Here is what Madison Trust requires:
- A Distribution Request form
- A draft of the Quitclaim deed
- A certified appraisal of the property value
How to Take a Real Estate RMD with a Roth Conversion
One of the purposes of a RMD is to enable the government to start collecting tax revenue. This is normally accomplished by distributing the asset and then paying the requisite taxes on it. However, this can also be accomplished by converting the account into one that requires taxes to be paid now. This is what happens with a Roth conversion. A Traditional Real Estate IRA can be converted to a Roth, which means that the tax bill is due now. Once the taxes are paid, the account can continue to grow without any further tax liability.
A client can do a total or partial Roth conversion of a property in their Traditional account. The process is similar for taking an in-kind distribution:
- Get a certified appraisal for the property that you want to distribute.
- Draft a deed that moves all or some of the ownership to the Roth IRA. If you only transfer some of the ownership, then the expenses and income will be split between the Traditional and the Roth accounts.
- The Custodian reports the Roth conversion on a 1099R (for the Traditional account) showing that all or some of the appraised property value was converted. This value would then be subject to taxes.
- The Madison Trust (Custodian) requirements for this process are a Roth Conversion form, a draft of the deed, and a certified appraisal of the property.
How to Take a Real Estate IRA RMD by Selling a Property
If an account holder would prefer not to get involved with an in-kind distribution or Roth conversion, then simply selling the property is an easy alternative. The account holder sells the property and pays taxes based on the proceeds of the sale.
- If the property is within an IRA LLC, the account holder can handle selling the property without any special requirements and send the sale proceeds to the Custodian.
- If the property is being held by the Custodian, then they would need to be included in the sale. The client would fill out a Sale of Asset form and send the Custodian all the relevant documents to sign. This usually includes the Purchase Contract, the HUD/Settlement Statement, and the Deed.
How to Take a Real Estate IRA RMD with Cash Assets
The simplest way to take a RMD from a Real Estate IRA is just to take it from a different account. Retirement investors often have more than one retirement account open at a time. They may have an old 401(k) from a previous job, a regular IRA that has a small amount of funds, and a Real Estate IRA where they have placed the bulk of their retirement funds. This works out great for distributions. This is because the IRS does not require that you take an RMD from all of your accounts. Rather, the individual account holder must distribute a certain amount of funds, irrelevant of which account it comes from. If you have a property in a Real Estate IRA that you would prefer not to distribute, then you can just make up the difference from one of the other accounts.
Do you still have questions about how to perform a Required Minimum Distribution for your Real Estate IRA? You can ask your question here and a Broad specialist will get back to you with an answer.
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