RMD in Year of Death for IRA Without Cash

Taxpayer died in November. He had not take in 2018 RMD. There are two IRA's. IRA #1 has cash and goes to a third party. The third party will take the taxpayer's 2018 RMD with respect to that IRA. IRA #2 only holds land. Spouse, who is over 70 1/2, inherits IRA #2. She wants to take ownership of IRA #2 and then take taxpayer's 2018 RMD for IRA #2 out of her own separate trandtional IRA.

I think if spouse wants to take taxpayer's RMD for IRA #2 out of her own IRA, she must first complete the transfer of ownership of taxpayer's IRA so that she owns both IRA's at the date the RMD is taken. Thoughts?

The problem here is timing. The custodian of IRA #2 is draging their feet about the transfer of ownership. Spouse is concerned about not being able to take the required RMD by the 12/31/18 due date. If she takes RMD from her own IRA before the paperwork for the transfer of ownership of IRA #2 is complete, will it count? Will it matter if both the transfer of ownership and the RMD are completed by 12/31/18 but with the transfer occuring after the RMD is taken?

I understand another option might be to take the full RMD out of IRA #1 (the one that contained cash), but the third party beneficiary will not go along with that plan even if he receives full compensation for the additional amount removed from the IRA plus the amount of any tax that may be due on the RMD.

I would try your best to get custodian to transfer land asset to surviving spouse IRA by December 31st and then take distribution . If this doesn't work out then consider taking 2 MRD's for the land value in 2019 and go thru the procedure of waiving the excess accumulation penalty as outlined on form 5329 . Your circumstances suggest a slam dunk waiver of the penalty .

The spouse must withdraw the deceased 2018 RMD before the rollover to her traditonal IRA can be completed. So check with your IRA #2 self directed custodian on their procedure for distributing a fractional interest(RMD value) in the land. Below is one custodians procedure:
Complete the following forms:
1. A Distribution Form. If you are only partially distributing the property, this must be detailed in the appropriate section.
2. A Fair Market Valuation (FMV) Form for the real estate being distributed. An appraisal of the real estate to be distributed. This must be performed by a third-party.
3. The reregistration document for the property (i.e. an un-recorded deed). This must clearly show full or partial ownership of the asset changing from “IRA Resources FBO [Client]” to the name of the new owner.

I believe the spousal beneficiary could elect to "treat the IRA as her own" and take the decedent's final RMD from what we can now call her "other" IRA(account). Once she treats it as her own, she only has one IRA, which happens to live in two different places; fulfill RMDs however you wish.

What's necessary to treat it as your own is the election process described in 1.408-8, Q-5. The election is made by re-titling the IRA in survivor spouse's name; it's deemed to have happened if you contribute to the IRA or fail to meet a beneficiary RMD. It's silent as to whether the re-titling process has to be completed by 12/31. I don't know why it would be necessary, as long as it's genuinely underway and spouse doesn't turn around later and try to treat it as a BDA instead. In this case it sounds like there's no risk of that and that she wants to treat it as her own.

Thinking from a 1099-R perspective, there would be an IRA payout under her SSN in 2018 no matter how it was accomplished. Coming from her IRA, it wouldn't be coded a death distribution, rather a Normal one. If the total amount is dictated by her spouse's RMD, so be it. Is it relevant that the IRA custodian for the land is being slow with re-titling it to her IRA? Isn't she treating it as her own once she sends in the paperwork to re-title it? No harm no foul?

"I believe the spousal beneficiary could elect to "treat the IRA as her own" and take the decedent's final RMD from what we can now call her "other" IRA(account). "

Disagee for OP's case where deceased had not taken RMD(ref: NOLO Twila Slesnick IRA's, 401k's and Other Retirement plans p165 under caution).
See also Reg 1.408-8 A-5 excerpt beow.
"However, if the election is made in the calendar year containing the IRA owner's death, the spouse is not required to take a required minimum distribution as the IRA owner for that calendar year. Instead, the spouse is required to take a required minimum distribution for that year, determined with respect to the deceased IRA owner under the rules of A-4(a) of § 1.401(a)(9)-5, to the extent such a distribution was not made to the IRA owner before death.

A-4(a) of § 1.401(a)(9)-5: Thus, a minimum required distribution, determined as if the employee had lived throughout that year, is required for the year of the employee's death and that amount must be distributed to a beneficiary to the extent it has not already been distributed to the employee.