There are many considerations when attempting to calculating FMV for various alternative assets held inside of fully self-managed IRA's and other retirement plans. Due to the very composition of these alternative investments, various adjustment factors can help when discounting the FMV if applied to real estate transactions or calculating ownership interests. If the situation occurs where a larger current discount is available, one can anticipate a nominal income tax strain during the distributions.
I took the time to highlight the top three valuation adjustment instances that can be used to discount the FMV of various Alternative Assets:
1. Minority Interests – If less than a 10% ownership interest is represented with in the IRA Plan from any one owner. Let’s say Henry has a 10% ownership interest in his family’s software company, with nine other owners each owning the same amount. He is an owner, but he lacks a controlling interest over the other shareholders, and the business as a whole. This affects the value of his shares.
2. Lack of Marketability - Securities that are not traded on a recognized exchange (i.e. NASDAQ, NYSE) have limited liquidity because they are not traded between millions of investors over a specified stock or commodities exchange. It could take a long time to find a buyer for a diluted ownership interest or rental real estate in order to convert to cash. If you are unable to quickly locate a buyer for your shares or your ownership interest, then the value of the underly security is adjusted accordingly.
3. Fractional Interests - Undivided fractional interests in real estate, even if you have a majority holding, tend to be more of a challenge to find a buyer than if you were selling the whole unit. Let’s say Uncle Monopoly died, and left a 46-unit apartment building to 8 different nieces and nephews. If one of the nieces decided to put her ownership interest on the open market, her share now comes with 7 other owners, each with their own agenda. These complications can greatly reduce the value of her share of the apartment building.