Self-Directed IRA Fair Market Valuations Explained

Fair Market Value IRAs

January 06, 2021

Mat Sorensen
An IRA must report its fair market value to the IRS annually. Fair market value is reported to the IRS by your IRA custodian via IRS Form 5498. For standard IRAs holding stocks or mutual funds, those account values are automatically determined as they simply take the stock or fund price as of the close of the market on December 31st each year. They then use these amounts to set the year-end account fair market value. For self-directed accounts, such fair market values are not readily available, and it becomes the IRA account owner’s responsibility to obtain their self-directed investment values so that their custodian can properly report the account’s fair market value. The value of an account is important for a few reasons. First, the IRS requires it to be updated annually. Second, it is used to set required minimum distributions (RMDs) for those account holders over the age of 72 with Traditional IRAs. Last, the account value is used when converting an entire account, or a particular investment or portion of the account, from a Traditional IRA to a Roth IRA.

 

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 (RMD, distribution, or conversion)
Real Estate Comparative Market Analysis (CMA) from a real estate professional is preferred. Some IRA custodians, like Directed IRA, accept property tax assessor values or Zillow reports in non-taxable situations (annual Fair Market Valuations). Real estate appraisal
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 www.bullionvalues.com.

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.

 

Since the valuation reporting policies of custodians vary, IRA owners should make sure that they understand their IRA custodian’s policies for valuations of the assets in question. For Directed IRA account owners, Annual Fair Market Valuations are due by March 1, 2021 for 2020 5498 reporting to the IRS. Please use one of these two forms below depending on whether you own assets directly in your IRA or whether you use an IRA/LLC.

Annual Fair Market Valuation Update — Self Certification

Annual Fair Market Valuation Update — IRA/LLC or 401(k)/LLC Self-Certification

 

Mat Sorensen

Mat Sorensen

Mat has been at the forefront of the self-directed IRA industry since 2006. He is the CEO of Directed IRA & Directed Trust Company where they handle all types of self-directed retirement accounts, which are typically invested into real estate, private company/private equity, IRA/LLCs, notes, precious metals, and cryptocurrency. Mat is also a partner at KKOS Lawyers. He is published regularly on retirement, tax, and business topics, and is a VIP Contributor at Entrepreneur.com. Mat is the best-selling author of The Self-Directed IRA Handbook, the most widely used book in the self-directed IRA industry.