What is a Fair Market Value and how does it affect my SDIRA?

A Self-Directed IRA is a powerful tool that can help you build your personal wealth, however it does come with responsibilities on the account holder’s part, as well. Around the end of every year comes the time self-directed IRA owners have to look into their accounts and gather information regarding the value of investments – Fair Market Values, or “FMVs”. One rule Self-Directed IRAs must follow is that every year investors must submit Fair Market Values, which is the worth of the investment, for the assets they hold in their IRA accounts.  

It’s important to understand FMVs and why they’re required for all Self-Directed IRA account holders in order to make sure you are compliant with IRS rules! If this is your first year submitting a Fair Market Valuation or you just need a refresher, this blog will give you the basic information about FMVs.

What is a Fair Market Valuation (FMV)

Understanding Fair Market Values can be complicated, but we try to make it easy to follow. According to the IRS, a Fair Market Value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.  Custodians will require this end-of-year estimate, and it is very important to submit this information since FMVs are required to be reported to the IRS each year. 

Because every investment will have its own worth, this means every asset in an IRA would need to have its own Fair Market Value. The due date to submit the FMV to Quest Trust Company is January 15th, 2021 for 2020, most custodians will begin giving reminders to submit these with plenty of time in advance. Sometimes it can take some work from the account holder in order to obtain the information needed due to the nature of the supporting documentation some investments require. 

Why Am I Required to Submit an FMV

Not only are Fair Market Values important to the IRS, they also help you determine information about your IRA, too. For those who have to take distributions, Fair Market Values help determine the required minimum distributions (RMDs) for the year. Fair market values are also often utilized in taxable situations like a Roth Conversion or an asset distribution, and also when determining the value of a property for a tax deduction after a casualty loss.

What Do I Need for a Fair Market Value

Most Fair Market Values will require supporting documentation be submitted along with an internal custodian form that contains your signature. There will be different requirements the custodian will ask for depending on what type of asset is held in the IRA.  

Real estate investments will commonly require an appraisal, broker’s price opinion, or county appraisal value, whereas private entity investments need a balance sheet or letter from the managing member, trustee or operator which states the value of the asset. Some investments, like interest only promissory notes, simply require the unpaid principle balance. Click here to see examples of acceptable supporting documents for assets held at Quest Trust Company:  https://www.questtrustcompany.com/fair-market-values/

While it’s not quite as fun as spending time with loved ones during the holidays, submitting your Fair Market Values is just as important. Not only will it be a reminder to review how your assets have performed the past year, but it can also help influence your decisions on future investment deals. Complete the year the right way by submitting your FMVs!

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