Valuation Update
Annual Fair Market Valuation Update — IRA/LLC or 401(k)/LLC Self-Certification
Fair Market Valuation for Taxable Event (Roth Conversion, In-Kind Distribution)
What is “Fair Market Value?”
The Fair Market Value of an investment has been broadly defined by the Court as:
“The price at which property would change hands between a hypothetical willing buyer and a hypothetical willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.” U.S. v. Cartwright, 411 US 546 (1973).
Now here’s the hard part: Even though the IRS requires IRAs to update their fair market value on an annual basis, the Government Accountability Office noted in their recent report that:
“Current IRS guidance includes NO [emphasis added] guidance or advice to custodians or IRA owners regarding how to determine the FMV [fair market value]”. United States Government Accountability Office, GAO-17-02, Retirement Security Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets. (Dec. 2016).
The absence of guidance, however, has not relieved IRA owners or their custodians from obtaining and reporting this information. While there is no specific fair market valuation guidance for IRAs, there are commonly accepted methods of reporting value used by professionals and companies within the self-directed IRA industry. Most of these methods have been adopted from law and regulations governing employer retirement plans or estates.
Methods to be used by Asset Type
The table below outlines the preferred valuation methods that are commonly used in the industry for the most common self-directed IRA assets. As you will note, when the valuation is needed for a taxable event, such as an in-kind distribution or Roth conversion, greater detail and supporting information will be required as the valuation will result in tax being due.*
| Asset | Non-Taxable (Annual FMV) | Taxable (Roth Conversion or In-Kind Distribution) |
| Real Estate | Comparative Market Analysis (CMA) from a real estate professional is preferred. Some IRA custodians accept property tax assessor values or Zillow reports in non-taxable situations. | Real estate appraisal is preferred. Some IRA custodians accept a broker’s price opinion. |
| Promissory Note | The value of a note can be reported by calculating the principal due plus any accrued and unpaid interest. This is the valuation method used for calculating the value of a note for estate tax purposes. | Same as the non-taxable, principal amount due plus accrued and unpaid interest. For notes in default, a third-party opinion as to value is typically required in order for the note to be written down below face value. |
| Precious Metals | For bullion, use the spot value of the metal in question times the ounces owned. Spot value is widely reported on a daily basis on financial sites. For acceptable coins, use market data for the coin in question via the Grey Sheets available at https://bullionvalues.org/ |
Same as non-taxable. |
| IRA/LLC | The IRA/LLC valuation is completed by adding up the value of the assets owned by the LLC. For example, an LLC that owns a rental property would have the LLC bank checking account as an asset (balance as of 12/31) and the property (use real estate method above to determine). The value of the IRA/LLC is determined by adding up these assets. | The IRA/LLC valuation is completed by adding up the value of the assets owned by the LLC. For example, an LLC that owns a rental property would have the LLC bank checking account as an asset (balance as of 12/31) and the property (use real estate method above to determine). The value of the IRA/LLC is determined by adding up these assets. |
| LLC, LP, or Private Company Interest | Obtain a third-party opinion of the value of the LLC interest. The value may be provided by the manager or officers of the company in which the IRA is invested in. The opinion should rely on IRS Revenue Ruling 59-60. For asset holding companies, the valuation should focus on the value of the assets. For operating companies, the valuation should focus on earnings. | A similar requirement, but the detail of the opinion should be more significant. For example, for an asset holding company where the IRA’s interest is determined by the assets of the LLC. A CMA would be acceptable for calculating that asset value in the company in an annual valuation. However, an appraisal of the real estate to calculate that asset would be required in a taxable situation. |
For Directed IRA account owners, Annual Fair Market Valuations are due by March 1, 2024, for 5498 reporting to the IRS. Please use one of these forms below depending on whether you own assets directly in your IRA or whether you use an IRA/LLC or 401(k).
