What should I do with a 1099-misc issued to my self-directed IRA?

[frangorman]

I have owned real estate in my self-directed ira for 8 years and have followed all the rules for only taking distributions via my self-directed ira administrator. This year for the first time the property manager's accountant has issued a 1099-misc for rental income sent to my ira which I have deposited in the IRA's bank account.  I am concerned about being taxed twice - on the amount sent to my IRA and again on actual distributions through my administrator which generate a second 1099.  Can I disregard the 1099-misc?  If not, what should I do with it? 

[MinhT · Accepted solution]

You do not enter the form 1099-MISC sent your self-directed IRA on your personal tax return.

Income in your self-directed IRA are tax-deferred. You should send that 1099-MISC to your self-directed IRA administrator who will keep it in the IRA's tax records.

[mike44102]

But the IRS checks to see if all 1099-MISC income is reported on tax returns.  If the Self-Directed IRA uses my personal SSN, my personal return will be flagged.  How can it be accounted for to avoid IRS challenge? And if challenged what would I need to do? 

[AbrahamT]

You have two options to account for the 1099-MISC that was reported in your Social Security number; however, I encourage you to take the first approach. 

1. Do not report it, as discussed in the comments above, and then send a copy of the 1099-MISC to your IRA Custodian. When the IRS contacts you about a missing 1099-MISC, then you will respond with an explanation. Your Custodian can also assist you in this response. Here's an article that will help you respond to a notice from the IRS. 
2. Another option is to report the 1099-MISC on your tax return. Then, make an additional entry in the Other Income section of your return. Report the 1099-MISC amount as a negative, which would effectively cancel out the income, but still report the form you received on your return. Still, keep all your records in case the IRS ever asks for more information.

@mike44102 Please see edited answer. 

[Edited 02/18/2024|2:24 pm PST]