Our story begins in the dark mists of time, the early 1980’s.
In the era of lycra and shoulder pads, self-directed IRAs were starting to get popular – big hair popular. Here’s how the deal worked: People with ample quantities of money in their IRAs and a profusion of (usually) real estate investment opportunities would marry the two.
First, they’d make the IRA self-directed by finding a bank that was willing to be a trustee and horse around with all the frequent service needs an account like this requires, which is not cheap. Then they’d use the IRA as an investment, usually to buy the real estate directly, or as capital to fund a business that would invest in the real estate. As you can probably guess, this is a lot of work. Here’s the cunning plan portion, though: they could buy real estate investments in their IRA and have all the favorable tax treatments that entails. Nice, eh?
So, what with the plan being all cunning and marketable, it got the dickens sold out of it. Specialty companies arose to service the demand, seminars and press releases abounded, and plenty of people got involved.
Now fast forward to the Now’s. There’s a little hitch – and the hitch was there from the start. The hitch is that the IRS says that IRAs need to be valued annually. Now, if your IRA is full of stocks, mutual funds, or what have you, this is pretty easy business. Now pretend your IRA is full of a single member LLC with real estate investments. Not so simple, is it? And what happens if regulators get all interested in valuation and compliance? What then?
There are also a couple other problems. What happens when it’s time to take the Required Minimum Distribution? Real estate is not quite as marketable and easily valued as a security. There could be some major problems.
I’ll tell you what, it’s a recipe for a hassle, which is brewing up as we speak.
So, what do we take away from this? Perhaps a cunning plan is not the best plan?