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How to Take an RMD When Your IRA Owns Real Estate

Miniaturized House Held Up by Hand to Setting Sun

  |  By Matthew White, CISP

For investors who own traditional self-directed IRAs, required minimum distributions (RMDs) are a fact of life. While investors typically take RMDs using cash from an IRA, RMDs can be trickier for investors whose IRAs own real estate.

Here’s a look at required minimum distributions and how to make an RMD when your IRA owns real estate.

Q: When do I need to begin taking RMDs?

A: Required minimum distribution rules do not apply to Roth IRA accounts while the holder is alive. But starting at the age of 72,[1] investors who own a traditional, SIMPLE, or SEP IRA are required to remove a portion of assets from their IRAs each year as a distribution.

Under the SECURE Act, your first RMD must be taken by April 1st of the year following the year in which you turn 72. For all subsequent years, required minimum distributions must be made by December 31st.

Q: I directly own real estate in my self-directed IRA, and I do not intend to sell the property. How can I take an RMD?

A: While the most common distribution method for traditional IRAs is cash, in the case of real estate, the typical RMD solution is to take a "distribution in-kind."

The IRS will allow you to distribute part of the property to yourself via grant deed, which effectively means your IRA will own part of the property, and you will own the percentage that has been distributed.

For example, say you own 100% of a piece of property in your IRA that's worth $100,000, and your RMD is $10,000. You can distribute $10,000 worth of that property to yourself via grant deed. Essentially, your self-directed IRA custodian assigns that portion of the property to you personally, and that satisfies your RMD for the year.

RMDs can also be taken from interests in promissory notes that are backed by real estate. You can distribute a portion of a Mortgage/Deed of Trust by having your IRA assign a beneficial interest of that security agreement directly to the account holder personally. Like direct real estate, the interest is assigned as a percentage of the remaining value.

Q: What if I have multiple IRAs?

A: If you have more than one IRA, you must calculate the RMD for each of your accounts. However, you have the option of taking your total distribution from only one account or by pulling funds from multiple accounts.

If your self-directed IRA is invested solely in illiquid real estate, but you have enough cash or stock in another IRA to cover your yearly RMD, you can use those liquid assets to take your full RMD. This approach eliminates the need to make an in-kind distribution from your self-directed IRA that owns real estate.

Whether your distribution comes out of one account or multiple accounts, you must be certain to take the total RMD required. (There are numerous online RMD calculators, including this RMD calculator from the US Securities and Exchange Commission, that can help you determine the amount you need to distribute).

Q: What if I own the real estate in my self-directed IRA with another person or partnership?

A: In these circumstances, a proportionate interest in your IRA can be deeded to you by your account. When this happens, the portion of the property deeded to you will then be counted as your personal property. 

However, if you own real estate in partnership with a limited or general partnership, the partnership may have rules regarding what is allowed as a distribution. It is best for you and your financial advisor to consult your partnership agreement to determine how the partnership allows you to take a distribution.

Q: When should I request my RMD?

A: It’s never a good idea to wait until the last minute to request your RMD.

You will need to submit the valuation of your real estate asset to your custodian. Your custodian will need to calculate how much of the property to distribute, and then make the actual distribution to you. This may involve changing the title of the asset to your name.

Be sure to build in extra time so any unanticipated delays do not push you beyond your distribution deadline.

Q: What happens if I forget to take my RMD?

A: There are penalties for forgetting to take an RMD. RMDs that are not paid out in the year in which they are due may be subject to a 50% excise tax on the amount not distributed as required. For instance, if your RMD is $10,000 and you only take out $5,000, you may be required to pay an excise tax of $2,500—half of the amount that was not distributed.

RMDs, real estate, and your IRA

If you hold a traditional, SIMPLE, or SEP IRA, RMDs should be part of your overall tax planning. It’s always best to work with a financial advisor or tax advisor to ensure you are meeting your minimum distribution requirements while also staying on the path to achieve your retirement goals. If you have questions about taking an RMD from your PENSCO self-directed IRA, you can contact us at 800.962.4238.


[1] Under the SECURE Act, the age requirement for account owners to take their first RMD increased from 70 ½ to 72 as of January 1, 2020. This age change applies only to individuals reaching 72 after December 31, 2019. If you reached age 70½ in 2019, you must take your first RMD no later than April 1, 2020.  
 

 

This Blog does not provide 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. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.