Ask an Advisor: We Own Millions in Real Estate Through Self-Directed IRAs. How Do We Transfer it to Our Sons?

My wife and I own five senior homes in our self-directed IRAs. How do we transfer them to our two sons after we die? Under the new IRS rules it appears that the boys have only 10 years to take the money out. The houses are worth about $1.75 to $2 million in total now.

– Jack

Yes, you are correct that most non-spouse beneficiaries are now required to withdraw the entire value of an inherited IRA within 10 years. This applies to self-directed IRAs as well, so your sons will need to address this at some point. However, the fact that your IRAs hold real estate may make distributions more complex.

If you need help managing your assets and planning your estate, work with a financial advisor with inheritance planning expertise.

The 10-Year Rule for Inherited IRAs

The SECURE Act of 2019 significantly changed the rules for IRA beneficiaries. Before the law passed, many beneficiaries could “stretch” distributions over their life expectancy. This allowed inherited funds to remain in the tax-deferred (or tax-free, in a Roth) account for decades.

With certain exceptions, most non-spouse heirs are required to fully withdraw the assets from an inherited IRA within 10 years of the original owner’s death:

If the original account holder had already begun taking required minimum distributions (RMDs), the beneficiary must typically continue annual withdrawals through years 1 to 9.
If the original owner hadn’t yet reached the age for RMDs, the beneficiary isn’t required to take yearly distributions but still must fully distribute the account within 10 years.

In your case, your sons will likely need to withdraw the full value of the IRA within 10 years of either your death or your wife’s. Whether they will also need to take RMDs during the first nine years depends on your and your wife’s ages when you pass.

Be aware that there is no exception for the RMD requirement (if it applies) or the 10-year rule just because the assets are not liquid. (And if you need help planning around these inheritance rules, speak with a financial advisor.)

How to Distribute Real Estate from an Inherited IRA

Taking distributions from an IRA is easy when it holds liquid securities like stocks, bonds and mutual funds. You simply sell enough of those assets to generate the necessary cash and take a withdrawal. Of course, it’s not that straightforward if you own physical property like real estate. Selling real estate generally requires more time and administrative effort.

But it also sounds like you want your sons to take ownership of the properties. If that is the case, they will need to transfer the property in kind. An in-kind transfer means the assets are moved directly to the beneficiary’s taxable brokerage account without being sold, so your sons would receive the property itself rather than the cash proceeds from a sale. This process is the same whether you want to do it proportionately over the 10 years to satisfy RMDs or all at once.

Start by contacting your custodian and letting them know what you intend to do. This is a good idea because they have done this sort of thing before. They can likely provide you with specific step-by-step instructions for how they handle it. This will involve:

Appraising the property: You’ll need to know the fair market value to calculate the appropriate RMD if it applies. More basically, you’ll need to know the property’s value to determine the value of the distributions. This allows your sons to properly record the transfers and determine their tax liability.
Taking an in-kind distribution: The custodian will help your sons complete the required paperwork to record a partial or complete transfer of ownership for the value of any in-kind distribution.
Updating the deed: Lastly, you’ll have to update the deed to reflect the ownership changes.

(And if you need additional help planning for in-kind transfers or other distributions, speak with a financial advisor.)

Tax Implications of Transferring Real Estate In Kind

An in-kind distribution of real estate just transfers ownership from the IRA to your sons. However, the transfer is still treated as a taxable distribution. They will include the fair market value in their ordinary taxable income.

The issue here is that your sons will need to make sure they have the liquidity to pay the tax bill. This is potentially a very large transaction, so I highly recommend they work very closely with their financial planner, tax advisor and the IRA custodian to think through the best approach. It would be good to speak with your sons early so they are not caught off guard.

Also keep in mind that while the SDIRA owns any part of the real estate, all of the prohibited transaction and disqualified persons rules apply. Your sons will need to be very careful not to run afoul of them. (And if you need help finding advice, this free tool can connect you with financial advisors who serve your area.)

Bottom Line

Yes, your sons will likely need to empty the inherited SDIRA within 10 years. They can transfer ownership of the real estate to themselves gradually or all at once. Otherwise, they can sell the property while it’s held by the SDIRA and withdraw the cash.

Inheritance Planning Tips

Some financial advisors can help coordinate your estate plan with your overall financial goals and project the impact of taxes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Ensure your will outlines who should receive your assets and how. Regularly review and update it after major life events like marriage, divorce, births or deaths. Also, use designations like “transfer on death” or “payable on death” to simplify asset transfers and avoid probate when possible. For jointly held property, confirm ownership structures reflect your wishes.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.