Valuing/Appraising Your IRA Account - What Are the IRS Rules?

What is a Self Directed IRA?

An IRA account that requires that the account owner to make all of the investment decisions is called a "Self Directed" IRA. A "Custodian" is required to hold the investments in the account and to do the record keeping and the governmental reporting. There are two types of IRA accounts; one type is known as a "Traditional IRA"; the other is know as a "Self-Directed" IRA. They both have the same governing rules and regulations. With a Self Directed IRA there are very few limitations as to what types of investments are allowed. The Traditional IRA is generally limited to investing in listed securities-stock, bonds, mutual funds, etc.

Investing in Promissory Notes/Mortgage Notes

Many private mortgage notes are funded through Self-Directed IRAs. Real estate investing and business investing can also be done in a Self-Directed IRA account.

IRS Reports Required

Section 408(i) of the Internal Revenue Code of 1986 requires that the Custodian of an IRA account make certain reports regarding such account to the Secretary of the Treasury and to the individual for whom such account is maintained.

Section 1.408-5 of the Income Tax Regulations provides that the Custodian of an IRA account shall make annual calendar year reports concerning the status of the account. The information required in the reports include: the amount of contributions, the amount of distributions, the value of the account, and such other information as the Commissioner of the IRS may require. IRS Form 5498 is the form used to satisfy Section 408(i).

Question:

Is the IRA required to value "hard to value" assets---promissory notes, partnership interests, real estate, closely-held stock, collectables, etc.?

Answer:

Yes, annually. These types of assets, that do not trade on a public market, must be valued annually. A written appraisal valuation report prepared by a recognized third-party expert is usually required to establish the fair market value of the asset.

Question:

Who is responsible for insuring that the IRA's assets are properly valued?

Answer:

The Custodian is responsible. The Custodian can order an appraisal valuation report, at the expense of the IRA account owner, to satisfy the annual reporting requirement.

Question:

What is the impact of declining property values on note values?

Answer:

IT IS HUGE! The historical value that you are carrying the note at in your IRA account may be overstating the fair market value of the note today by 15%, 25%, 50% or more.

Many promissory notes that were originated between 2002 and 2006 are now valued at a discount of 15% to 50% of their unpaid balance. That means that you are paying fees based on too high a value. Getting a current value appraisal may save you money on fees year after year.

Remember, "You can't do today's investing with yesterday's methods and be in business as an investor tomorrow" Unknown author

Lawrence Tepper specializes in: PROMISSORY NOTE SERVICES, VALUATIONS AND BROKERING
EXPERT WITNESS AND EXPERT CONSULTING SERVICES NATIONALLY

EDUCATION AND TRAINING- 1956 Law Degree /Accounting Minor from University of Denver
1961 to Present Colorado Real Estate Broker Specializing in Promissory Notes
1984 Certified Commercial Investment Member Designation From National Assoc. Realtors

PRACTICAL EXPERIENCE- Over 45 years of buying, selling, exchanging, brokering, and structuring promissory notes. Detailed, documented professional valuation reports for attorneys, CPA's, estates, and financial planners.

http://www.promissorynoteappraisers.com