Zero Value Asset
Zero Value Assets in Self-Directed IRA
Self-Directed IRAs can be incredible tools, but as with any investment, there is risk involved. Unfortunately, some assets go awry for several reasons and may have lost their value or otherwise become uncollectible. We identify an asset is “bad” when our account holder has no recourse to collect on the investment. Alteration of a specific term alone does not necessarily make the investment bad. Some potential scenarios for a bad investment could be if the company an account holder invested in becomes insolvent and the interest in the company may be uncollectible, or if a lien on a property is wiped and the borrower is personally insolvent. When this happens, the client will request to “zero value” the asset so the asset may be removed from the account.
Our process is simple, complete the Zero Value Form and submit the supporting documentation. Once the asset has been devalued down to $1, it will be distributed to you via the appropriate 1099 tax form. As the custodian of the accounts we hold, part of our responsibility is to report the proper value of your IRA to the IRS. As a company we have set firm guidelines for what is considered proper substantiation. These guidelines were set based on many variables, including but not limited to regulatory requirements and industry standards. Examples of supporting documentation may include a letter from an attorney, a discharge of debt from bankruptcy, or a letter from the company stating the value. Reach out to our office for further clarification on acceptable documentation.
Frequently Asked Questions
For example, if an IRA owns a secured note – when does it go bad?
- A senior lien holder forecloses on the property. This does not make the investment bad. The lender can still go after the borrower personally. The note has just become unsecured.
- If the lien is wiped like in the first scenario and the borrower is insolvent. The note may be uncollectible at this point.
For example, if an IRA owns a piece of real estate – when does it go bad?
- In most instances real property does not go bad. If there is a house on a property and that house burns down the land it was built on still has value.
For example, if an IRA owns a private entity investment – when does it go bad?
- If a company goes out of business this does not make an investment bad. The managing partners may still be liable for the company debts.
- If the company is insolvent the interest in the company may then be uncollectible.
Quest will require a valuation from a non-disqualified third party. In most instances, you will need to hire a licensed individual such as an attorney or appraiser depending on the type of investment held.
We understand that having an investment go bad is not ideal. Especially when the investment is in your retirement account. We know the work that it takes to grow your retirement account to such a substantial size, so we understand it is hard to face an investment that has gone bad. Our process is simple, complete the Zero Value Form and submit the supporting documentation. Once the asset has been devalued down to $1, it will be distributed to you via the appropriate 1099 form. Please note this process usually takes several months and sometimes years, this is in part to obtaining the supporting substation.
As the custodian of the accounts we hold, part of our responsibility is to report the proper value of your IRA to the IRS. As a company we have set firm guidelines for what is consider proper substantiation. These guidelines were set based of many variables, including but not limited to regulatory requirements and industry standards
Not addressing an uncollectible investment timely can become more complicated and cumbersome. The investment will continue to be valued at the last known value, which will inflate the balance of your account and can affect your RMDs (if applicable). General maintenance of the investment such as submitting an accurate FMV annually will still apply, and fees will continue to be assessed. If the investment falls out of compliance, which most uncollectible investments do, it will be distributed to you at its last known value, which may result in taxes and penalties.
Since the value of your investment will essentially be written off, supporting documentation is required to devalue the investment. We understand every situation is unique, so our Special Service team is prepared to answer any questions.
Yes, the term “self-directed,” distinguishes our responsibilities from a traditional IRA custodian. Self-directed accounts allow clients to select their own investments, which are often the same type of investments they are familiar with outside of their IRA.
Quest does not provide any tax, legal, investment, or structuring advice. This means that Quest does not conduct due diligence for the investment our clients select for their individual accounts. We do not select the investment, nor do we review the documentation to ensure the quality of the investment.
As the custodian, there are certain legal requirements and general responsibilities we must fulfill for the accounts we administer. However, it is important to distinguish these responsibilities from the responsibilities our clients owe to their individual account(s).
Clients are considered fiduciaries to their individual account(s). This means there is a heightened level of responsibility they owe to their Quest account(s). For clients, due diligence is a step-by-step process to help protect your IRA from investment fraud and to determine if it is the right investment for your IRA.
Know the Difference
| QTC Responsibilities | Account Holder Responsibilities |
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Please speak to a professional before devaluing an investment in your IRA to fully understand how this impacts your retirement account. Quest Trust Company does not provide any tax, legal, investment or structuring advice. If such advice is sought, it is encouraged to consult with an accountant, attorney, or a financial advisor.
