One of the requirements for IRA custodians like STRATA is to report the fair market value (FMV) of IRAs to IRA owners each year and to the Internal Revenue Service (IRS) annually on IRS Form 5498. While determining the value may be easy when an IRA owns investments quoted on national exchanges (as with stocks, bonds, mutual funds, etc.), it can be more challenging when it comes to IRAs that hold alternative investments such as private limited partnerships, limited liability companies, and closely-held private stocks. Reporting the FMV of these alternative investments can be difficult when there is no organized market or exchange.
Lack of IRS Guidance
In recent years, the U.S. Government Accountability Office (GAO) conducted a study and found that IRA owners “can face challenges meeting their responsibilities to provide updated FMV information to their custodian.” The GAO also made recommendations to the IRS to provide improved guidance to IRA owners and to IRA custodians regarding the FMV of alternative investments with IRAs – and that guidance has not yet been given.
While there are no specific guidelines issued by the IRS on how IRA custodians should report the FMV of alternative investments, most IRA custodians report the FMV provided to them by the investment issuer. If an investment issuer is unwilling or unable to provide an updated FMV to the IRA custodian on an annual basis, the IRA owner is ultimately responsible for obtaining and providing an updated FMV from an independent third party to the IRA custodian. For real estate, it’s fairly easy since the IRA owner can obtain an updated appraisal or broker’s opinion of the value each year.
Annual Request for FMV Update
Most IRA custodians, including STRATA, will mail an annual request for updated FMVs directly to investment issuers. For directly-owned real estate properties, STRATA will mail an annual request to the IRA owner to obtain an updated appraisal or broker’s opinion. These FMVs are then used by the IRA custodian to report the value of the IRA to the IRS on Form 5498, and part of Form 5498 requires the IRA custodian to report whether the IRA holds any “hard to value assets” like alternative investments.
Other Taxable Events Require an FMV Update
Updated FMVs may also be required for taxable events such as the in-kind distribution of an asset or a conversion to a Roth IRA. FMVs are also needed when it comes to accurately calculating the required minimum distribution (RMD) at age 70½. In these cases, the IRA owner should obtain an independent third-party valuation or real estate appraisal and provide it to the IRA custodian. This will allow the IRA custodian to report the FMV of the taxable event accurately to the IRS.
As always, IRA owners should consult their attorney or tax advisor before directing the investment of an alternative asset within an IRA. This will help ensure they understand their responsibilities when it comes to their self-directed IRA and the FMV reporting requirements of alternative assets.
|For more information about FMVs, please contact us at 866-928-9394 or Service@StrataTrust.com.|