Every year, the IRS requires a report of the value of your IRA assets. Fair market valuation (FMV) is not only a requirement for self directed IRAs, but for all IRAs. But, the process of ascertaining the value of non-liquid investments differs from reporting the value of more traditional assets like stocks, bonds, and mutual funds.
This reporting is simpler for a brokerage in which stocks, bonds, and mutual funds have a daily closing price. That is why you never hear your brokerage asking for an FMV. For self-directed IRAs with alternative investments, gathering this information is a little more complicated. IRA custodians do not typically perform the valuations of alternative assets themselves. They require the IRA owner to engage a qualified third party to provide the valuation.
So, how do you calculate the required minimum distribution for illiquid assets? How does the IRS know what amount to tax you on an in-kind distribution or an in-kind Roth conversion? To track potential taxable income, federal law requires IRA custodians to obtain and report the FMV of IRA assets yearly.
What the IRS Requires:
The IRS requires Midland Trust to report the values of clients’ accounts as of December 31st of each year. Separate from the IRS’ requirement, this valuation is important because the value determines the Required Minimum Distribution (RMD) for clients over 72. Whether your account has an RMD or not, your IRA’s activity is still reported annually to the IRS. IRA custodians are required to report your account’s information on tax form 5498 each year in May.
Why Is an FMV Important?
The value of an IRA’s asset is needed to perform a variety of custodial functions:
- Annual reporting to the IRS on the year-end value of everything held in the IRA
- In-kind transfers – ensures each IRA custodian has the same value recorded at the time of transfer
- In-kind distributions and in-kind Roth conversions – since these create taxable events, the IRS needs to know the value of the asset at the time of distribution or conversion
- Calculating required minimum distributions (RMDs) and beneficiary distributions
How Do I Properly Report the FMV of an Asset?
You will need to complete a Midland FMV Form or update the asset value in your Midland360 Online Portal.
- As a self‐directed account holder, you are responsible for ensuring this form is complete
- You nor any disqualified parties may determine the asset value
- An independent, neutral, and qualified third party must value the asset
- You must attach supporting documentation
What Can I Use for Supporting Documentation?
You may use a certified appraisal or a valuation from a real estate website (such as Trulia, Zillow, or Realtor.com). You may also use the tax assessor’s “estimated market value” provided by the county in which the real estate is located.
Closely-Held LLC or LP
The value of each asset in the LLC is required. If your LLC owns real estate, the same standards as listed above apply. If you have other assets, such as bank or brokerage accounts, submit the statement for that account that correlates with your valuation date. A K‐1 is not acceptable as it represents a historical value.
Contact the manager of the private placement and ask how you can obtain a value for your investment. A periodic statement or letter from the manager on the company letterhead will suffice. The manager cannot be yourself or a disqualified person to your IRA.
Futures, Forex, and Brokerage Accounts
A year-end statement of each account should be provided to the IRA owner by the futures, forex, and brokerage company. The statement for your trading account may also be available online through the company’s website or client portal.
Notes and Mortgages
Typically, the value of a note is equal to the outstanding principal balance. You only need to provide an updated valuation for notes if the current value differs from our records. It is essential that you closely review your account statements to ensure the records appear correct. This includes the proper allocation of principal and interest payments received.
Assets You Consider Worthless or Are in Bankruptcy/Litigation
Provide any documentation you may have at this time. We may contact you regarding additional requirements for updating your account.
FAQs About Fair Market Valuations
- Will a K1 suffice for valuation?
Unfortunately, no. A K-1 is not an assessment of value because the K-1 provides the value of the asset as of the end of the previous tax year and is a ‘snapshot in time’ value.
- What does the sponsor need to submit for values?
The investment sponsor needs to submit a letter or spreadsheet of values (along with the value date). As long as the document includes the asset name, price/units, price date, and is sent by the asset manager, this will be sufficient to update Midland’s records.
- What if the value has not changed?
If the annual value has not changed, we still need substantiation for our records to reflect that the value has remained the same. As Custodian on the account, we are required to have this on file at least once per year for every asset that we custody.
- Our annual audit isn’t completed until after 12/31, can I submit the values then?
Yes. If your annual audit has not been completed by the time you receive our request, please call our office and let us know when we can expect the updated value. We understand that valuations take time, so we give clients and investment sponsors until the end of the first quarter to send these to us prior to assessing late valuation fees.
- Why can’t the investment entity fill this out?
The investment entity can fill in the Fair Market Valuation. However, the client will need to sign and date it in Section 4 confirming the information being submitted to Midland.
- Where do I submit the FMV form?
You can send this paperwork to
Fax: (239) 466-5496
Email: [email protected]
Mail: P.O. Box 07520 Fort Myers, FL 33919
You can update your fair market valuations on our Midland 360 portal.
Providing FMVs as an Investment Sponsor/Manager
Not all clients will receive a request for updated fair market valuations. If the asset the client is invested in provides a frequent update, whether it be monthly, quarterly or annually, these satisfy the FMV requirement. To update the asset’s value, statements can be sent to: [email protected].
For assets that have multiple clients in one holding, the investment sponsor/manager may send a spreadsheet of client investment amounts and any known change in value, along with a current price date.
If you have any questions regarding completing your fair market valuation, please call our office at (239) 333.1032 or email us at [email protected]. You can access FMV and other account forms here.