Today’s REI Classroom Lesson

Clay Malcolm elaborates on why annual valuations are needed for hard assets and goes into how they work.

REI Classroom Summary

Depending on whether or not you’re taking scheduled distributions, the type of appraisal needed might differ. Listen in as Clay explains more!

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Clay: Hi, everybody, and welcome to the REI Classroom. My name is Clay Malcolm with New Direction IRA and today, we’re going to be talking about IRAs that invest with real estate and the need for that IRA to have annual valuations done on its hard assets.

Mike: This REI Classroom real estate lesson is sponsored by FlipNerd Investor Coaching, your blueprint to investing success.

Clay: Okay. Let’s go ahead and get started in talking about annual valuations as they relate to IRAs that own real estate or hard assets. And I’ll just back-pedal a little bit and say that all IRA assets do have to be valued each year at a minimum. You know, lots of assets, and certainly most of us who had IRAs in the past, or 401(k)s, are kind of used to those tax advantaged funds being invested in publicly traded securities.

So valuing those, because of the way the stock market is, is very easy, right. You just pull it right off the computer. When it comes to hard assets and alternative assets, the IRS still wants the valuation of those assets, but they’re not as cut-and-dried or easy to access as something that’s, you know, got a marketplace that’s updated as frequently as publicly traded securities are.

So the IRS, again, they’re tracking the money, so you’re getting tax advantages for this money, it can buy real estate, but they’re tracking that money because they’re giving you those tax advantages over years or even decades. So one of the mechanisms that they have in place to track that money so that, ultimately, they get the tax event that they think they deserve, is that IRA providers have to submit a form called a 5498 to the IRS every year and it values all the assets in an IRA.

Now, up to tax year 2015, that form was very general, just an amount that the IRA was worth. Starting that tax year and every year since, which is just this year, I guess, that 5498 does have some categorization of the assets, and, in fact, category D is real estate. So not only are you delineating a little bit of what the assets are, but you’re also needing to value them, and we report each of those category values.

Now, the valuation procedure is often determined not so much by the IRS, who says that valuation has to occur, but by the IRA provider themselves. They tend to build a business model around their custodianship of your IRA. And I’ll use us as a test case, but the industry standard is very similar to this so you might encounter this with whoever you’re using.

In a year where there’s no tax event, in other words, your IRA-owned property is simply either generating rent or just staying pat, then the valuation can be relatively informal from our perspective because there’s no real tax event being generated so the IRS is probably going to be less intent on that being the actual value. So, often, we’ll accept a broker price opinion or an expert valuation that’s less formal than a formal appraisal. Sometimes we’ve even used county tax records.

Now, on the years where there might be a tax event, so if the IRA holder’s taking a distribution or they’re going to make a traditional to Roth conversion, or something like that, we go into a mode where we ask for a formal appraisal, and largely, this is for the account holder’s protection. If you take a distribution, obviously, you are altering your tax status with the IRS and so you want to make sure that they feel comfortable that you’ve, you know, connected the dots and they have the ultimate tax event that they expect. And so, we’ll ask for a formal appraisal and that will make sure that the tax event is what the IRS would expect.

The idea that somebody would be on a distribution schedule… So, that’s kind of a one-time event, but if the event is that I’m going to take distribution of my assets over a period of years, we’ll work with the account holder, and often, we will only require the formal appraisal once every third year, or something like that.

We’re trying to balance the desire of the IRS to have an accurate valuation with the practical needs of the account holder, and not make it too onerous. So those things go into account when the IRA provider is deciding how those annual valuations have to be met. But I think the best rule of thumb is to just think, in the years without a tax event, it can be relatively informal. In the years where there is a tax event, you might need to do something that’s a little bit more formal so that the pricing is a little bit more exact.

Thanks for joining us on the REI Classroom today. My name’s Clay Malcolm with New Direction IRA. We’ll see you next time.

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Clay Malcolm
Clay Malcolm is the Chief Business Development Officer for New Direction IRA. In this role, he oversees marketing, education programs, and facilitates the training of business development and client representative teams. Clay has shared his expertise regarding self-directed IRAs and HSAs at speaking engagements across the United States. Currently, he teaches continuing education classes for CPAs, CFPs, and real estate professionals as well as presenting informational sessions for retirement investors looking to acquire precious metals, real estate, private equity, and more. Clay received his Bachelor of Science degree in communications from Northwestern University.