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Dear Brass Tax Presentations,
How is selling a rental held in an IRA treated? Would the proceeds be treated as ordinary income when distributed?
Thanks for your help.
From Brass Tax Presentations
Self-directed IRAs can be complex, with numerous potential issues and a need for clear guidance from the IRS. For this answer, I’ll assume that the client has never used the rental property held within the IRA for personal use, which can have significant tax implications.
The only time the Self-directed IRA will need to worry about reporting anything is if it receives UBTI in excess of $1,000. The sale of real property is generally excluded from UBTI (IRC Section 512(b)(5)). However, if the property was acquired using debt, then it is possible that the sale will generate UBTI (IRS Regulation Section 1.514(b)-1(a)). If there were loans on the property, we would have to do a deeper dive into the tax implications for the IRA on Form 990-T.
If there were no loans, the proceeds from the sale would go straight into the Self-directed IRA. The IRA would not pay tax on the proceeds, and the beneficiary would only pay tax when they take a distribution (subject to ordinary income rates).