My tax client received an “in-kind” distribution from an IRA in 2020.  Taxable income was $110,000 and the distribution was coded in Box 7, as K7.  K=No readily available FMV 7=Normal Distribution.  The IRA had been established 40+ years ago and a large cash balance had been accumulated over the husbands working career.  The IRA was converted to a self-directed IRA and 3 building lots in a high end golf course development, were purchased for $300,000.   Eventually the husband passed and the wife(my client) inherited the IRA.  I had no prior knowledge of the IRA and neither did the wife.  Over 50 years, the lots had depreciated from the original $300,000 to a FMV of $110,000 in 2020.  The lots were appraised and the title company transferred ownership to the client.  I had been sweating having to tell the client she was going to have a large tax bill but she had already been briefed by the Trustee.

So check out my questions and assumptions.  I would be grateful for any comments or suggestions on this matter.  Thank you.

1.  The basis of the lots will be $110,000 for future tax purposes.

2.  The $190,000 is lost forever and there is no deduction for the loss.

3.  The lots will have a FMV step-up to the heirs when my client passes, even if she moves the lots in to a Grantor Trust.

4.  My client will have to pay taxes on $110,000 at ordinary income rates.

5.  There would have been no way to roll this over or combine it with another IRA because of the in-kind distribution.

Bill Bevan, EA