Untimely IRA rollover leads to trouble

The IRS denied a taxpayer’s request to waive the 60-day rollover rule when he couldn’t prove that his medical condition affected his ability to make timely IRA rollover distributions.
The taxpayer tried to buy real estate as an investment in his individual retirement account but didn’t know how to do it properly, despite having a team of professional advisers. He ended up with a taxable distribution instead of a real estate investment in his IRA.
“Frank’s” intention was to buy an investment property and “place it into” his self-directed IRA. To make sure everything was done correctly, he hired a CPA, a lawyer, a financial adviser and a real estate agent to help him with the transaction.
DOOMED TO FAILURE
So far, so good. On Feb. 1 and Feb. 6 of 2013, Frank took two IRA distributions that he used to buy the investment property. By doing so, Frank had already doomed his transaction to failure. He had taken two distributions from one IRA on two different dates and following the once-per-year IRA rollover rule (both the “new” and the “old” interpretation of the rule), only one of them was eligible for rollover. However, he went on to make matters worse. He used the money from his IRA distributions to buy the investment property outside of his IRA. He then intended to put the property into his IRA, completing what he thought would be a 60-day rollover.
Around the time he bought the real estate, he was undergoing treatment for an illness, which he claimed was a contributing factor to his inability to adequately manage his finances, including the real estate purchase. He said he didn’t complete the rollover within 60 days because his medical condition weakened his ability to handle his finances and he was confused regarding the structure of the transaction.
The IRS denied Frank’s request for more time to do the rollover. As a result, not only are his IRA distributions taxable, but any income or capital gains generated from the real estate investment property will not be tax-deferred because the property is not held inside his IRA.
As far as his medical condition, the IRS noted that “during this time, taxpayer continued to maintain employment and handle his other affairs.” This implies that whatever his medical condition was, it wasn’t serious enough to diminish his ability to handle his IRA — at least in the IRS’ opinion.
ROLLOVER WINDOW
Even if Frank got the investment property back into an IRA within the 60-day rollover window, it still would not have been a valid rollover. In fact, had Frank completed such a transaction, the tax consequences of doing so would have been even more severe than what he already faces, due to the “same property” rollover rule.
For IRA-to-IRA rollovers, including Roth IRA-to-Roth IRA rollovers, the property distributed from the original IRA account must be the same property contributed to the receiving IRA account. These rules also apply to SIMPLE and SEP IRAs.
If cash is distributed from an IRA, as was the case with Frank’s distributions, then cash must be rolled over within 60 days. An individual cannot, as Frank falsely believed, receive an IRA distribution of cash and then roll over property (such as shares of stock or real estate) that he bought with the cash or that he currently owns. If such a transaction were to occur, not only would the amount of the failed rollover be taxable, but the property contributed to the IRA would likely result in an excess contribution, subject to a 6% penalty each and every year until it was removed.
There is an exception, however, to the same-property rule for rollovers of property distributed from a company retirement plan, such as a 401(k). If a distribution of property is made from a company retirement plan, the recipient has a choice. He can either roll over the same property to an IRA, or he can sell the property distributed from the plan and roll over the cash proceeds from the sale. This is true even if the sale proceeds are greater or less than the value of the property when it was initially distributed from the company plan. The client would not have to recognize any loss or gain on the sale, either.
What about all those advisers and professionals Frank had hired to help him buy the property? Aren’t they at least partially responsible for the untimely rollover?
Basically, the IRS said it was his own fault.
Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott’s Elite IRA Advisor Group. He can be reached at irahelp.com.