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IRS Annual Requirements for Alternative Asset Valuations

The IRS requires all retirement plan accountholders to obtain and report the fair market value (FMV) of assets held in their account(s) on an annual basis. The current value of some investments—such as publicly traded stock—is easy to track, while other investments may be harder to value. But this doesn’t change the reporting requirement. The accuracy of this information is important for several reasons:

  • It establishes the tax liability for distributions to the IRA owner or beneficiaries.
  • It is used to determine required minimum distributions.
  • It determines the tax liability for conversions from a Traditional IRA to a Roth IRA.

For STRATA Trust Company accountholders, all FMVs are due by April 30, 2024, in order to meet the IRS deadline of May 31, 2024.

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What Exactly Is Fair Market Value?

Normally, the fair market value is the price that a willing seller and willing buyer agree to on the open market in an arms-length transaction. The worth of the asset is based on an estimate of market value and not the cost of the asset. This valuation is easy with certain investments—such as publicly traded securities or precious metals—because they are bought and sold frequently on well-established markets. Alternative investments that are not publicly traded may present some valuation challenges. Therefore, self-directed IRA owners must generally work with their investment provider or contract with a qualified, independent third party to complete this valuation.

Supporting documentation is required for all FMVs submitted to STRATA. If a third party “Valuation Agent” is used to obtain the FMV, they can not be considered a disqualified person as defined in Internal Revenue Code 4975. Additionally, to stay in compliance with IRA rules, investors cannot pay for expenses out-of-pocket—they must be paid directly from the IRA account. If a cost is incurred to obtain the FMV, be sure to submit a copy of the invoice for payment using STRATA’s Expense Payment Authorization form.

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Non-Traded Alternative Investments

In many cases, the entity providing your alternative investment will provide a current valuation to the IRA custodian. The custodian will include this valuation in the IRS Form 5498 which is filed and sent to the IRS on May 31. If your investment issuer does not provide a current valuation, you will need to hire a qualified Valuation Agent to prepare an objective, accurate valuation. To simplify the process for STRATA IRA accountholders, we will work directly with the investment issuer to obtain the FMV. If we are unable to obtain the FMV, then we will reach out to the accountholder for assistance. STRATA will contact accountholders and communicate the process so that you are well prepared to meet this IRS requirement with ease. In the meantime, review STRATA’s Self-Directed IRA Knowledge Center for a step-by-step overview of the FMV timeline and process.

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Directly Owned Real Estate Investments

In the case of directly owned real estate investments, for instance, substantial variations may arise between the tax assessment value and the actual fair market value of the property. The assessed value is not generally acceptable across financial institutions because it may not reflect the actual fair market value of the property.

For STRATA IRA accountholders, you have four options for submitting real estate valuation updates:

(1) Certified real estate appraisal;

(2) Broker price opinions (BPOs);

(3) Comparative market analysis (CMA).

    • For each of the above options, a certified appraiser or other real estate professional is needed and a  signature on the documents submitted is required.

(4) New for 2024 — Supporting documentation from an approved third-party website (Zillow, Realtor.com, or Redfin) will be accepted.

    • If your FMV update changes the asset value by 50% or greater, a third-party website valuation cannot be submitted. You will need to provide a signed and certified real estate appraisal, BPO, or CMA.

For a step-by-step overview of the FMV timeline, and additional tips for directly owned real estate investments, view STRATA’s Self-Directed IRA Knowledge Center article, What are the Annual Requirements for Directly Owned Real Estate FMVs?

New for 2024: STRATA’s Real Estate Valuation form has been updated to include fast, electronic form submission through ServiceNOW. Accountholders can easily complete, sign, upload supporting documentation, and securely electronically transmit your FMV update directly to STRATA. Click the link below and a pop-up will appear—enter your email and get started today!

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Late or Missing FMVs

If the annual FMV requirement is received late, then fees may apply. If the FMV is not received at all, STRATA must resign as custodian for the account and distribute the asset in-kind to you because the IRS reporting obligations cannot be met. The distribution of the asset will be considered a taxable event, and penalties and additional taxes may be incurred.

Should you have any questions, visit STRATA’s Knowledge Center to learn more about IRS Form 5498 or the FMV process. You may also submit a request to our Client Services Team online, chat with us through our website, or book a meeting at a time convenient for you.

Tags: alternative investments, IRS Reporting, IRS Rules, taxation