« Email Consulting Guidance – HSA Transfer Mistakes or Difficulties | Main | Email Consulting Guidance – CRP Contract as an IRA Investment »

Tuesday, March 22, 2022

Email Consulting Guidance – Roth Conversion

Email Consulting Guidance – Roth Conversion

Posted by James M. Carlson
October 2021

Q-1. I have another unusual situation I’d like to run by you. AB serves as custodian for an IRA that holds three rental properties. One of the rental properties is a condo recently purchased by the IRA for about $180,000. The Account Holder also has a Roth IRA with I cash and securities worth about $90,000. The client has asked if there is any way to get the condo out of the IRA and into the Roth. He is willing to accept a taxable distribution up to $90,000.

So a few issues to consider. First, is there any way to produce this result that does not violate any of the self-dealing rules? Second, is there a way to accomplish this with minimal income tax consequence to the account holder? Any insight you can provide is appreciated.

A-1. I understand a person is allowed to convert an in-kind asset within a traditional IRA to a Roth IRA. You mention the condo currently has a value of approximately $180,000. Does the traditional IRA have any debt related to this condo investment?

The critical requirement is - what is the FMV of the condo as of the time/date it is converted? You mention that he is willing to accept a taxable distribution up to $90,000. He doesn’t get to vote. I don’t believe he can’t convert only part of the condo. For example 50% this year and 50% next year:

If there is no debt and he converts this condo, he will be required to include $180,000 in his 2021 taxable income. I assume he has no basis in any of his traditional, SEP or SIMPLE-IRAs.

If there is debt of $90,000 on the condo so the traditional IRA’s equity in the condo is $90,000, then he would include only $90,000 in his income for 2021. I assume there would be some legal costs in making the change in ownership from being his traditional IRA to his Roth IRA. He would need to verify this with his tax adviser or attorney. The financial institution making the loan to his traditional IRA or Roth IRA should be independent of AB. There would also be some legal costs in changing the loan documentation. The borrower would be the Roth IRA versus the traditional IRA.

There is discussion in Congress that the Roth IRA conversion rules might be changed by Congress and President Biden.

Posted by James M. Carlson at 13:57.39
Categories: Email Guidance