Rollover of Non-Cash Distribution
In regard to rollovers, popular non-cash assets are privately held stock, farm equipment, and real estate of either a residential or commercial nature.
Distributions of property other than cash present special tax problems, but they do qualify for rollover treatment as long as the property is not prohibited by the IRA rules (e.g., investment in certain “collectibles” is prohibited for IRA purposes). The actual non-cash property distributed must be rolled over in order to qualify for tax-free treatment. However, the recipient is allowed to sell the property and roll the proceeds. Employees who get a property distribution can’t keep the property and roll over its cash equivalent.
Gains and losses on a sale of the distributed property are not recognized if all the proceeds are rolled over. Any increase in the FMV between the time of distribution and the time of rollover is treated as part of the distribution (assuming rollover of the entire distribution). (Code Sec. 402(c)(6)(D))
Example - Retention of Property in a Rollover - Claire received a payout from her employer’s profit sharing plan. The distribution consisted of $12,000 in cash and $14,000 of other property. Within the sixty-day window, Claire contributed $26,000 in cash to an IRA and kept the property she had received as part of the distribution. Under these circumstances, only $12,000 of Claire’s IRA contribution qualifies as a tax-free rollover.
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Example - Sale of Distributed Property at a Loss - Assume the same facts as in the previous example, except Jim sold the stock for $25,000. In this case, his maximum rollover is $90,000 ($65,000 cash plus $25,000 stock proceeds). He recognizes no gain or loss on the sale to the extent he rolls over the entire distribution. Neither will he recognize any taxable income from the lump sum distribution. The instructions for the 1040 provide no special directions for reporting such a non-taxable rollover. Presumably, the entire distribution (in this case $105,000) would be reported as rolled over.
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Example – Sale of Distributed Property at a Loss with Partial Rollover – Maria received an eligible rollover distribution from her employer’s noncontributory qualified employee plan of $80,000 in non-employer stock on October 1. Within the same year she sold the stock on November 1 for $70,000 and on November 10, she rolled over $55,000 of the $70,000 sale proceeds. The $15,000 she didn’t roll over includes part of the loss from the stock sale. She reports a capital loss of $2,143 ($10,000/$70,000 x $15,000) and ordinary income of $17,143 ($80,000/$70,000 x $15,000)
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