Purchase of Non Standard Asset from an IRA
A client holds a non-standard asset in the form of member units of a LLC which is invested in a real estate deal. The member units represent 2% of the deal.
This position is held and valued at TD or Schwab as a non-standard asset of $50,000 which is the orginal purchase price.
The custodian is now requiring quartlerly valuations from the Manager of the LLC which is which unreasonable per the LLC Manager since this 2% is the only piece in any IRA and there is no other
requirement to provide valuations. let alone quartlerly valuations.
The LLC Manager is asking the client if he can sell the non-standard asset out of the IRA. The client has agreed, but does not know if he would be allowed to purchase this
asset from the IRA personally. If so, he would be willing to pay the market price that the custodian is carrying the asset which is $50,000 per the LLC Manager valuation.
Can this be done? If so, how does it get accomplished? If not the client himself (is this self dealing even though the client has not made the valuation or is this purchase not permitted anyway?)
Could the LLC Manager buy out the client’s position in the IRA?
Help…
Permalink Submitted by Alan Spross on Sat, 2010-02-27 21:41
If the client purchases shares from his IRA, it is a prohibited transaction (per A below) per Sec 4975 copied below, as he is a disqualified person with respect to his IRA:
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c) Prohibited transaction
(1) General rule
For purposes of this section, the term “prohibited transaction” means any direct or indirect –
(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;
(B) lending of money or other extension of credit between a plan and a disqualified person;
(C) furnishing of goods, services, or facilities between a plan and a disqualified person;
(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or
(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
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Permalink Submitted by Steve Sarovich on Sat, 2010-02-27 23:09
Thanks.
Could the IRA position be purchased by the Manager of the LLC? or another one of the real estate member unit holders?
Permalink Submitted by Bruce Steiner on Sun, 2010-02-28 02:05
Note the words “direct or indirect” in the prohibited transaction rules that Alan cited. In view of that, the application of the prohibited transaction rules can be complicated. The original poster should consult with counsel, who can give him specific advice based upon the particular facts and his objectives.
If a proposed transaction would be prohibited, you can apply to the Department of Labor for an exemption.
Permalink Submitted by mk foss on Wed, 2010-03-03 04:58
When people get into these quandries normally the only way to get the asset out is to distribute it. If someone receives a property distribution from a qualified plan – they can roll the asset into an IRA or sell the asset without recognizing gain or loss and roll over the proceeds. I haven’t come across a case where an asset is distributed from an IRA and an equivalent amount of cash is rolled back to the same or a different IRA. It doesn’t seem right.
However, if he’s willing to pay tax on the $50,000 he can avoid the prohibited transaction by receving a distribution.