(866) 818-4472

Open Account Client Login

PENSCO Blog

PENSCO Blog

Fresh alternative asset insights and the latest news on real estate and private equity investing.

A Primer: IRA Fair Market Value Reporting Requirements

  |  By Deanna Fong

The Government Accountability Office (GAO) released a report in December (2016) recommending that the IRS provide clearer guidance for retirement savers who invest in "unconventional" or "alternative" assets—like real estate or private equity—in self-directed IRAs. One area in particular where the GAO found the IRS should take action? Providing guidance on fair market value (FMV) of alternative assets held in IRAs.

All assets held in IRAs must be valued every year for IRS Form 5498 reporting. While determining the value of a publicly traded stock is straightforward, figuring out the FMV— the price at which an asset would change hands between a willing buyer and seller—of an alternative asset is more challenging. Add to this the fact that the GAO found that the IRS does not provide any guidance for IRA custodians or IRA owners on how to determine the FMV of hard-to-value alternative assets.

According to attorney and self-directed IRA expert Frank Bridges, reporting accurate values of alternative assets in your account is important. If you have to make a distribution in kind, if you are converting a traditional IRA to a Roth IRA, or even if you are making minimum distributions of cash from another account after age 70½, the taxable income reported on your personal tax return depends on the value of your self-directed IRA. If the account value is wrong, you could pay penalties for under-reporting your income, or you could end up paying more tax than you should.

To provide self-directed IRA investors insight on IRA fair market value reporting requirements, PENSCO recently hosted a webinar with Frank L. Bridges[1]. A founding attorney at Heritage Design Law Group, Frank specializes in providing services to retirement savers who use their IRA funds to make private investments.

The following are insights from the webinar directed at self-directed IRA investors about the process by which their IRA custodians receive fair market value information. Frank’s presentation was based on the process and timeline he follows with PENSCO. Other custodians may have different requirements.

Reporting Annual Fair Market Values for PENSCO IRAs: A Timeline

PENSCO requests updated valuation information annually, and mails most valuation requests to issuers/asset sponsors (e.g., general partner, manager, corporate officer, etc.) or clients in the case of real property, by the end of February. The letter asks for the FMV value of the asset as of Dec. 31st of the previous year. Letters sent this year request the FMV of your assets as of Dec. 31, 2016.

PENSCO requests receipt of the FMV by March 31, and uses those valuations to file Form 5498 with the IRS. Part of this form reports the fair market value of "hard to value assets" held in your IRA—assets that are not readily tradable on a securities market or option exchange, or that do not have an easily available FMV.

What Counts as a "Hard-to-Value" Asset?

  • Stock in a private corporation that is not readily tradable on an established securities market
  • Long and short-term debt obligations (not traded on an established securities exchange)
  • Ownership interests in a limited liability company (LLC) or similar entity
  • Real estate
  • Ownership interests in a partnership or trust
  • Option contracts or similar product not offered on an established option market
  • Other assets with no readily ascertainable FMV
     

How can the FMV of Some of the Most Popular IRA Assets be Determined?

For private stock:

  • Use its book value
  • Hire a business appraiser to determine the value of the stock
  • Use the buy-out value or formula included in a shareholder arm's length agreement
  • Refer to recent purchase offers that put a value on the stock

For long or short-term debt obligations (not traded on an established securities market):

  • Use the debt's principal balance plus accrued interest
  • Use the value determined by an appraiser that takes into account the value of the security, its default status and the credit-worthiness of the debtor

For ownership interests in a closely held LLC or partnership:

  • Use its book value
  • Hire a business appraiser to determine the value of the stock
  • Use the buy-out value or formula included in an arm's length agreement between members
  • Cite recent purchase offers from third parties

For real estate:

  • Use its purchase price if the real estate was purchase relatively recently
  • Use the value determined by a real estate appraiser
  • Get a real estate broker's opinion of value
  • Use websites that report market values such as realtor.com

When it comes to saving for retirement, every situation is unique and so are many alternative asset opportunities. It is always recommended that self-directed IRA investors work with a tax and/or legal advisor. We will be watching the GAO closely and will update this blog when the IRS provides clearer guidance.

To learn more about IRAs and how Frank Bridges determines the FMV of alternative assets, please watch our webinar:

 

This blog is intended for general and or educational purposes only and is not intended as investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”). Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.

 

[1] PENSCO is not affiliated with Frank Bridges or Heritage Design Law Group.