Rental Property Distributed from IRA

[Thom]

I have a client who contributed two rental houses to an IRA in late 80s. They were distributed back to him in 09 and he received a 1099 for appraised value of property at time of dist. It seems to me that the taxable amount of the dist will be the 1099 amount less whatever his basis was when he contributed it. I assume also that his basis would be lowered if he took the $2000 deduction when he put it in the IRA (I think that was the allowed max amount back then). I’m just wondering if I’m on the right track with my thinking before I have him digging through 20 year old records to find old basis of houses & whether he took a deduction when it was contributed to IRA. Am I going about this correctly? Thanks for any help.

[jainen]

>>a client who contributed two rental houses to an IRA <<

In my opinion, that was a prohibited transaction. IRA contributions can only be made in cash. He owes the 6% excise tax for the excess contribution for all these many years, AND the fair market value of the distribution is fully taxable as ordinary income without regard to basis. Good luck!

[Thom]

I've never known how the houses got in an IRA. I didn't get my CPA license until '94 so I'm a little blurry about laws prior to that. I do know that he had a CPA firm & trust dept of a bank set it up for him. But it's in my lap now & I'm trying to figure out how to handle it.

[jainen]

>>I've never known how the houses got in an IRA<<

Okay, I misunderstood that in the original post. An IRA can BUY rental property, but it must pay full cash price without financing. There are additional problems if the taxpayer helps select the tenants or does any kind of repair or service on the property. But if he didn't have a mortgage and did have a property manager, he's probably okay.

Basis of the property is irrelevant. Like any other distribution, just use his IRA basis as a whole (if any) as tracked on Form 8606.

[Thom]

Thanks for your reply. After taking a break from this, I kind of cleared my head and came to some of the same conclusions. Even though his terminology was that he "contributed" the houses to the IRA (that didn't make sense to me either, but didn't know what laws were out there in the 80s) but I'm with you that the IRA must have purchased them. Like you said, it seems like I'm still going to have to get him to go through old returns though to see if he had any basis in the funds used for purchase. I'm sure he was good with the other qualifications as the bank trust dept managed the property. Thanks a bunch for your help.

[Lion EA]

If the properties were purchased with funds in his IRA from deductible contributions, then he has no basis. If he has basis in his IRA -- his IRA as a whole, all IRA accounts of that type, traditional since it dates back to the 80s -- the a proportional amount of basis would be applied to this distribution if it is less than a total distribution. See his Forms 8606 for his basis information, if any.