Trust distribution

[Max W]

Client formed a trust for the purchase and sale of investment property - house.

About 80% of the funds for the purchase came from client's IRA accounts, the remainder from the client.

The client and the IRA's (4) are all beneficiaries of the trust.

The IRA administrator says that no K-1 is required for them.

If so, how is the profit distributed to the IRA's reported on the clients' K-1 if there is no taxable event for the IRA's?

[BulldogTom]

Danger...Danger...Danger.

I think that you may be looking at a prohibited transaction.  I am not an expert in this area, but I think I read that while an IRA may hold real estate in it, the Trustee of the IRA account must be the holder of the title, and the owner of the account cannot.  And there can be no cash coming from the individual from outside of the IRA funds.  This smells very bad.  If I am right and this is a prohibited transaction, then the IRA funds used to make the purchase are deemed to be distributed in a taxable event.  If the IRA holder is under 59 1/2 years old the early withdrawal penalty may apply as well.

Check it out and be careful.

Tom
Newark, CA

[Roberts]

I didn't know you could merge taxable money with tax exempt money like that.

You can buy real estate within an IRA / using an administrator but it's complicated and if he had taxable money (you write "from the client") involved there has to be a K1 for that portion at minimum. If it's all within the IRA - don't think a K1 would be required but I've never done this. Seems there is no taxable event until they withdraw funds - no? Just as if you borrowed money within the IRA plan - the borrowed / leveraged portion is taxable. you'd have to break down the profit / loss between invested capital versus debt capital. If you are adding borrowed funds a portion is taxable to the client.

Edited February 5, 2016 by Roberts
added info

[Randall]

55 minutes ago, BulldogTom said:

Danger...Danger...Danger.

I agree:  DANGER!!  Will Robinson.

 

[jasdlm]

If the property is owned 20% by non-ira sources, it is a prohibited transaction.  That is ugly.  However, you might want to double-check the facts.  I would think that if a client had gone to the trouble to set this up, he would have used an IRA administrator that specializes in this and would not have allowed a disqualifying set-up.  Alas, maybe I assume too much, but it just seems strange that the IRA administrator would not have advised the client appropriately.  

Your client is prohibited from 'self dealing', also, so I assume he has a property manager that is caring for the properties and handling the leasing, etc.

And of course, I'm sure none of his friends, children or family members are living in any of the properties!

Good luck.

[Max W]

Need to clarify the original question.  The Administrator of the IRA's invested the funds into the trust.  The funds were not withdrawn by the client.  The distributions were pro-rated strictly on the percentage of investment.

[jasdlm]

Is a portion of the real estate owned by non-IRA money?

[Roberts]

20 hours ago, Max W said:

Need to clarify the original question.  The Administrator of the IRA's invested the funds into the trust.  The funds were not withdrawn by the client.  The distributions were pro-rated strictly on the percentage of investment.

JMO but I think if there is debt - a K-1 is required because the pro-rated income is taxable on that debt share.

If there is no debt and there is no non-IRA asset invested and nothing was physically distributed - I don't think a K-1 is required because it's a non-taxable event.

[Max W]

The final determination was that K=1's had to be issued so that the distribution can be show even though it may not be taxable on the other end.

[Randall]

Are distributions shown on 1041 K-1s?