Question: It is tax time and we get a lot of questions about how to determine fair market value for real estate in a self-directed IRA LLC which must be done every year. Will the appraised value on the tax bill suffice?
Answer: In my IRA LLC I own a couple of rental properties and four real estate notes. The IRS does not require a formal appraisal each year for properties that you own, which is good because that would be costly.
Some custodians may allow you to use that as the fair market value, but I don’t think that is an accurate appraisal and I recommend having a third party do a market analysis.
I hire a realtor friend of mine to do the market analysis for me and I pay him through the IRA LLC. Keep in mind that all costs associated with IRA investments must be paid for out of the IRA. My friend finds comparable properties that have sold in the same neighborhoods and comes up with an estimated value of each of my houses.
I hire a CPA to valuate my real estate notes. I send him copies of the account statements from the escrow company that receives the payments on my notes. I also send him copies of the actual notes. The CPA reviews the documents and drafts a quick letter stating the values of the real estate notes. I always like to have an independent third party review my investments and sign off on the values.
Now that I have the values of my assets I have to add any cash that I have sitting in my IRA LLC checking account. Once I have the total of all my cash and assets I need to subtract any liabilities that I have in my LLC. As you may recall from one of my previous blogs I have occasionally borrowed money on non-recourse loans in order to purchase investments in my IRA. I currently have two outstanding non-recourse loans, so I subtract what I owe on the loans from my total cash and assets to determine the fair market value of my IRA LLC.
Once I have done all of this I send the values and the corresponding documentation to my IRA custodian.
Your IRA custodian will use this information to create your form 5498, which is sent to the IRS each year to keep them happy.
As you can see the process is much less painful that it sounds.