Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Thursday, July 31, 2014

Tax Court Issues Ruling Against IRA Owner


In Dabney v. Commissioner, a recent U.S. Tax Court case, the Court ruled against an IRA owner and regarded his IRA as distributed and taxable since the IRA owner failed to properly execute his intended self-directed IRA real estate investment. 

Rather than invest his IRA into real estate, Mr. Dabney dispersed his IRA and used the funds to buy real estate outside of his IRA.  Charles Schwab subsequently issued Mr. Dabney a 1099-R for that distribution, which Mr. Dabney contested, arguing that the funds were used to buy a property owned by his Schwab IRA.  Yet, the Court ruled against him because his funds were distributed outside of his Charles Schwab IRA and because his IRA funds and the real estate were not held by a self-directed IRA custodian that allowed for IRAs to own real estate.  The Court explained that an IRA can hold real estate, but that Charles Schwab’s policies did not allow for Mr. Dabney’s IRA to own real estate.

In order to properly execute a self-directed IRA investment into an asset such as real estate, the IRA owner needs to roll over or transfer their IRA funds first to a self-directed IRA custodian who allows the IRA to won real estate and then that self-directed IRA will take title and ownership to the IRA asset directly. 

See Mat Sorensen, Tax Court Rules Against IRA Owner Who Failed to Properly Make a Self-Directed IRA Real Estate Investment, The Self Directed IRA Handbook, July 29, 2014.


Estate Planning - Generally, New Cases, Non-Probate Assets | Permalink

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