Purchase foreign real estate in your IRA: Tapping into your Personal Land Bank! You have probably heard by now - some individuals are investing their IRAs and rolled-over 401K plans into real estate that they personally select. The federal government recently released their statistics on IRAs - and the findings were stunning. Over four trillion dollars are in IRAs and most of that money is invested in Stocks, Bonds and Mutual Funds - riding with the ups and downs of the stock market. Yet less than ½ of one percent of IRA holders have self-directed IRAs. What does that mean to you as an investor? That money can be put to work in real estate of all types. Yes - an IRA holder can lend his IRA, or borrow from someone else's IRA (as long as they are not disqualified). You may own investment property in your IRA both in the US and in many foreign countries - including Costa Rica. Your IRA CAN buy real estate in Costa Rica ! If you are looking at real estate overseas, or for a way to get better returns in your IRA, here is little secret your stock broker will never tell you about... How Can You Do This? The rules governing the ownership of real estate in Costa Rica this way are simple. First, you may purchase practically any real estate you can imagine: raw land, condos, office buildings, single or multi-family homes, apartment buildings and improved land. You can also own a fraction of real estate, with other entities or investors owning other fractions. You can purchase an option on the real estate or you can buy outright using a land trust, L.L.C., or similar entity. Also, you can rollover your IRA, so you are buying the real estate with retirement assets. The Main Limitation The one exception is that you can't use the Costa Rican real estate in your IRA as your residence or vacation home, if you are under 59 & 1/2. This is logical, since your retirement funds are tax deferred and are meant to be used for your retirement In other words it can be any kind of property, but you can't use it personally, unless you are already retired and take the amount as a distribution. Other Limitations Your business can't lease space in your IRA-held property. You cannot place real estate that you already own into your IRA. Your spouse, your parents, or your children also couldn't have been the previous owners of the real estate. Property owned by siblings may be allowed, since the Internal Revenue Code (section 4975) specifies that only "lineal descendents" be disqualified. Buying the Property Your IRA custodian must actually buy the real estate you are investing in. So, the title will really be in their name, not yours. You may put up the deposit with your personal funds, in order to reserve the property until the legal structure is in place, in this case you have to be sure you include that amount in the total due so you get your money back from your IRA at closing. How you can set up the account - the IRA custodian You will need an independent IRA custodian that allows real estate investments and work with that company to set up an IRA account. Most banks and brokerage companies, limit your choices to products they sell. However, section 408 of the Internal Revenue Code permits individuals to purchase real estate with funds held in many common forms of IRAs, including a traditional IRA, a Roth IRA, and a Simplified Employee Pension plan, or SEP-IRA. To find a custodian that specializes in real estate, search under terms such as "real estate IRA" or "self-directed IRA." In Costa Rica or Panama, your realtor or the developer may be able to help you find a reputable tax attorney or organization that can assist you with this. You can't serve as the custodian of your own account. It is important to select a custodian knowledgeable about the types of investment you're interested in, because the custodian holds title to the real estate. It is vital that you find a custodian who will permit foreign property or leveraged property. What if your IRA doesn't have enough money? If the property is financed, you must structure the purchase correctly so as to avoid adverse tax consequences down the road. Also keep in mind that if the property is leveraged, the debt must be a non-recourse promissory note. But it is possible for your IRA to take on a debt. Another way is to purchase an interest in the property along with others, such as a spouse, business associate, or friend. Operating property in your IRA Because all property expenses, including taxes, insurance, and repairs, must be paid from funds in your IRA, you'll need liquid funds available in your account. Of course, all income generated from the property will be deposited in your IRA account so you might use that money to cover your costs. Or you can make annual contributions within federal guidelines: $3,000 annually to a traditional or Roth IRA ($3,500 if you're age 50 or older); and as much as 25 percent of your annual compensation, up to $40,000, if you're a self-employed individual with a SEP-IRA. If your account doesn't have funds to cover property expenses, you will have to withdraw the property from your IRA and pay taxes on the value of the property, as well as possible penalties for early withdrawal. Selling the property The buyer cannot be a family member. Once a deal closes, your IRA account now holds the cash - ready for you to make your next move. A great way to build up your retirement fund is to sell property with seller financing so that all payments made by the buyers are paid to the IRA. Distributing your property You can withdraw real estate in Costa Rica from your IRA and use it as a residence or second home when you reach retirement age (age 59½ or older for a penalty-free withdrawal). Either the IRA can sell the property, or you can take an in-kind distribution of the property. In that case your IRA custodian transfers the property title to you. If you expect the property to appreciate and you want to eventually take it as a distribution, then the Roth IRA is your best vehicle (see below) whether your retirement strategy is to hold properties or buy and sell for gain, real estate investing through your IRA can yield extraordinary returns toward your future retirement. IRA Options * A traditional IRA lets you deduct annual contributions (currently set at $3,000, or $3,500 if you're age 50 or older) from your income. However, once you begin withdrawing money, those funds will be taxed as regular income. * A Roth IRA gives you no deduction on your current contributions (again $3,000), but does allow you to withdraw funds tax-free. If you expect to buy a real estate investment in an IRA and hold it for a long period, this is probably your best option, particularly if the property increases in value over that period. If the property was held in a traditional IRA, you have to pay income taxes on the current value of the property when you sell it or take it as a distribution. With a Roth IRA, you won't owe taxes at distribution; this is the best way if you anticipate that your real estate investments will appreciate over time. * A SEP-IRA is designed for self-employed individuals and small companies. You can contribute up to 25 percent of your compensation, or $40,000, whichever is less. However, keep in mind that if you have employees, you must make contributions for them as well. This option is a great alternative for real estate practitioners who can make the higher contributions because they can build up funds more rapidly to purchase properties. Withdrawals from a SEP-IRA are treated like those of a traditional IRA for tax purposes. All you need to get started in using your IRA for real estate investing is a third party administrator such as the http://www.trustetc.com/index.html (the IRS does not allow you to hold and transact with your own account), some IRA funds, and your own real estate investment ideas. All types of real estate qualify to be held in an IRA - and clients are buying just about everything: Single family homes, apartment buildings (many with LLCs), condos, pre-construction and plain raw land. Keep in mind, once you IRA purchases property, all the rental proceeds belong to your IRA, and all expenses must be paid from your IRA. Should the property later be sold, all the funds are deposited into your IRA. Just remember, if you direct your IRA to buy a property, you cannot get personal benefit from it, nor can members of your immediate family. For example, you cannot buy a beachside condo with your IRA, and then stay in it once a year for your vacation. As a real estate investor, you may have considerable advantage over the general public. You understand the power of real estate, and you are surrounded by experts that can assist you in all aspects of your investments including acquisition, rental, rehab and sale. You are undoubtedly motivated to act, and now, with your IRA or someone else's IRA you have access to the funds necessary to get going.
What you may not realize is how few of the general public know and understand the power of self-directing their own IRA.
The IRS lets you purchase real estate with income that is tax-deferred. That means that many savvy investors are investing their IRA funds in real estate.
This is a great way to beat the ups and downs in the stock market, to diversify your portfolio or to provide a stable income as you transition from riskier investments.
Once your account is open and funded, you simply direct your administrator to buy or sell property in the name of your IRA. The best part is that - just as in any IRAs, the gains are not taxed until you withdraw the funds. Thus you don't need to worry about capital gains, hold periods, 1031 exchanges or any other tax consequences deriving from the transaction.
