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How to Value Real Estate Assets in a Self-Directed IRA


  |  By Chris Shanahan, CISP®

With tax time fast approaching, it’s a good time to remind folks that all assets held in IRAs must be valued at year-end on an annual basis for IRS Form 5498 reporting. For traded securities like stocks and bonds, these valuations are relatively simple to obtain and are easily accessed by the account owner, the IRA trustee/custodian and the account owner’s financial professional. However, for self-directed IRA account owners who hold real estate assets, the process for determining fair market value is a bit more challenging.

In general, there are two common ways that people can find out the fair market value of their investment properties. The first way takes more legwork but is usually more accurate, while the second way is easier but inspires less confidence in the result. Let’s review both options:

First, the harder (but more accurate) way: Ask a licensed real estate professional in the area where the property is located to provide you with a comparative market analysis. This is the method that’s typically preferred by IRA custodians. This is different from an appraisal which, while much more thorough, can cost hundreds of dollars and is not necessary for most self-directed IRA custodians. The exception might be when there’s a qualifying event that would warrant a full appraisal, such as an in-kind distribution to the client personally, or any other kind of taxable event. But for valuing a property on a year-to-year basis, the comparative market analysis should suffice.

How do you go about getting a comparative market analysis? In most cases, the agent who helped you find the investment property or the broker who consummated the deal can be a good resource. Often these real estate professionals will provide a comparative market analysis for free.

Then there’s the easier (but less preferred) way: Use an industry website like Zillow or Trulia to determine fair market value. In fact, if you don’t provide your self-directed IRA custodian with the value by a certain date, this is how many of them will go about determining it for you. It can be a tempting option for people that don’t have the time to obtain the comparative market analysis, but there are a couple of caveats to be aware of. First, if your custodian does the analysis for you, they usually charge a fee for doing so. And second, the comparative market analysis is generally a better indication of true market value. And since this value affects your tax liability, accuracy can go a long way to giving you peace of mind.

As always, it’s a good idea to consult your tax/legal professional to decide what method works best for you and your self-directed IRA.

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.