Required minimum distributions when your IRA owns a building

This is the problem people discover at 72 and should have solved at 60.

The collision

Starting at your required beginning age, a traditional IRA has to distribute a minimum amount each year, computed from the prior December 31 balance and an IRS life expectancy factor.

The computation does not ask what the account holds. A $600,000 building produces the same required distribution as $600,000 of money market fund. The building does not produce cash on command.

Miss the distribution and the excise tax is 25% of the shortfall, reduced to 10% with prompt correction.

The four ways out

1. Aggregate across your IRAs. The most common and easiest answer. RMDs are computed per IRA but can be satisfied from any IRA or combination of them. So if you have a brokerage IRA with liquid assets alongside the self-directed one, take the entire amount from the liquid account. The building is untouched.

This alone solves the problem for most people, and it is the reason not to move your whole portfolio into the self-directed account. Leaving liquid assets in an IRA at a brokerage is a plan, not an oversight.

Note this does not work for 401k plans, which each must pay their own.

2. Use the rent. If the property cash flows and the account accumulates cash, the distribution comes from the account's own cash balance. Model this ahead: a property netting $18,000 a year inside a $600,000 account will not cover a distribution requirement in the mid twenty thousands once the factors get steeper, so the shortfall grows every year.

3. Distribute a fractional interest in kind. The IRA deeds you a percentage of the property equal to the required amount, based on a current appraisal. You pay income tax on that value. Now you personally own, say, 4% of the building and your IRA owns 96%.

This works and it is done. It also means a fresh appraisal every year, recording fees every year, and a co-ownership arrangement between you and your own IRA that grows more complex annually. The co-ownership itself requires care, because you are a disqualified person relative to the account, and every expense must split by the exact current percentages forever. Do not do this without an attorney.

4. Sell the property. Always available, rarely on your timeline. This is the outcome the first three options exist to avoid, because a forced seller in a soft market is not a position anyone chooses.

The Roth answer

Roth IRAs have no required minimum distributions during the owner's lifetime.

Which makes a Roth the natural home for an illiquid asset. Rent compounds tax free, no distribution is ever forced, the property can be held for decades, and heirs inherit under the beneficiary rules with the asset intact.

If you are choosing where to hold real estate and you have both account types available, the Roth is usually the better container specifically because of this. A Roth conversion done in a low income year, before the property appreciates, is the version of this that people who plan well tend to have done.

Illustrated

An account holds one property appraised at $500,000 and $20,000 of cash. The owner turns 73. Using a life expectancy factor of 26.5, the required distribution is roughly $19,600.

With aggregation and a separate $400,000 liquid IRA: take the whole $19,600 from the liquid account. No issue.

Without a liquid IRA: the account's $20,000 of cash covers year one almost exactly, leaving nothing in reserve, which is its own hazard. Year two, with an appreciated balance and a steeper factor, the requirement rises and there is no cash. The choices are an in-kind fractional distribution or a sale.

The difference between those two scenarios is a decision made years earlier about how much to move out of the brokerage IRA.

What to do now

If you are more than a decade out, consider whether the property belongs in a Roth, and whether a conversion makes sense before it appreciates.

If you are within a decade, keep a liquid IRA large enough to fund roughly a decade of distributions, and build the account's cash reserve deliberately rather than treating rent as reinvestable.

If you are already there with an illiquid account and no liquid IRA, talk to your CPA about the fractional in-kind route now, before the first required year, so the first appraisal and the co-ownership paperwork happen on a calm schedule.

Illustrative arithmetic. Your CPA decides your situation and confirms your own factors and dates.