High Fees & Taxes due on land in an IRA Custodial account?

[RustyRaven]

Hello.  I bought bare investment land back in 2009 and placed it in a traditional IRA custodial account.  The land is currently worth well less than originally paid for. (And no capital gain is ever expected.)   The quarterly custodial account fees are rather high and I'm considering removing the land title/property from the custodial account.  My question is, "When would taxes be due?"  The year the property is removed from the IRA account?  If so, would it be the current county-assessed value?  Or would taxes be due on capital gains when the land is actually sold (maybe years from now)?   [If taxes are less than fees in the long run, then I'd remove the land.]

[Anonymous_]

@dmertz 

[Mike9241]

it's taxable as ordinary income based on the fair market value when distributed. if you are under 55 there's a penalty for early withdrawal. the FMV becomes your tax basis. so that's what's used if you sell the land later. 

the county-assessed value may not be the FMV so you may need an appraisal. 

[NCperson]

@RustyRaven - as with any IRA, when there is a distribution, there is ordinary income tax due on that distribution.  whatever the value of the land is when it is distributed creates a) the taxable income and b) creates the cost basis should it ever be sold in the future.

[RustyRaven]

Thank you @NCperson that adds some helpful information. It appears that my cost basis might be lowered (a bad thing) if I take a distribution now?   For instance, say I invested $20,000 in 2009. Now it’s assessed at $5000 today at the time of removal from my IRA (creating a distribution event). My basis would be lower, thus increasing my capital gains.  Say it sells at $15000 in a few years;  Ordinarily, that would be a loss (15k - 20k = -5k). But if I have to reassess my basis, it could appear to be a gain of 10k (15k - 5k = 10k). Yikes. Am I interpreting this correctly?

[NCperson · Accepted solution]

@RustyRaven correct, but look at it this way, if you left it in the IRA and later sold it for $15k and immediately distributed the proceeeds you'd pay ordinary income tax; if you distribute now and it appreciates to $15k later, you'd only pay at the capital gain rate upon sale.  

<<Ordinarily, that would be a loss (15k - 20k = -5k)>>

you can't look at it like that....you never paid income tax on the intial $20k investment; presumably it went into your IRA tax deferred, so in essence, part of the loss within the IRA from $20k down to $5k was 'house money' since the IRS willl never require you to pay tax on the loss (sounds convoluted to "pay" tax on a loss, but remember you never paid income tax on the $20k to begin with),

[RustyRaven]

@NCperson Makes sense now.  Thank you.