Purchasing Foreign Property with a Self-Directed IRA

If you’ve been considering owning your dream retirement home in Costa Rica or other foreign country but are delaying the decision until you’re closer to actual retirement age you may want to think twice. The pickings may be so slim and/or may become exorbitantly expensive by the time you feel ready that it will be no longer be possible.

There’s an option available you may not be aware of called the self-directed IRA. You can use your retirement funds before you retire to buy your retirement home today without incurring taxes or penalties. Keep in mind you can’t purchase property that you will live in now but you can purchase it, rent it out and then funnel the money tax-deferred back into your IRA. Or… you can just hold onto the property while it builds equity. Once you hit retirement age you can take your standard distribution and essentially buy your property from your IRA. Although most people have not been aware of it, this has been allowed for decades. The Employee Retirement Income Security Act of 1974 gave account holders the right to personally direct their retirement money into investments of their choosing, including real estate.

If you already have an IRA, 401(k), 403(b), SEP, Roth, or other retirement account you can roll that money into a self-directed IRA then use that capital to purchase or build the retirement home of your choice as rental property. The law states that you cannot incur any personal benefit before retirement age. Since this investment is done on behalf of your retirement account (and not you personally), the income you receive from rental payments is realized tax-deferred within your account.

To establish a self-directed IRA we recommend you work with a qualified provider who specializes in self-directed IRA LLCs which provide the IRA holder with checkbook control of the funds. In contrast, traditional IRA custodians allow foreign investment but must coordinate and charge a percentage fee for each transaction. Fees for self-directed IRA/LLC accounts typically include a one-time setup fee plus a flat annual fee, usually around $150. Whichever account you choose, the process to purchase a piece of real estate as an IRA investment is fairly simple. You must make the purchase in the name of your IRA or in the name of the LLC, and you must pay for the property with IRA funds.

There are some prohibitions. IRS mandates that due to conflicts of interest, neither you nor a close relative can live in the home now, as this would be considered a prohibited transaction with a disqualified person. However, you can hold onto the property, lease it out to "arms-length" renters, build your retirement account with the rental payments, then take the real estate as a distributed IRA asset when you can take distributions penalty free (after age 59 and a half). After that, you can move in and enjoy the home you’ve waited so long to occupy!

Be aware that you will need to pay IRA distribution taxes based on the fair market value of the property at the time you take it out of the account and according to whatever tax bracket you are in at that time. If, by that time, you happen to be in a lower tax bracket, the savings could be substantial. And if you invested in the real estate using a Roth IRA, you might save even more. Because your taxes were already paid upfront, you will not have to pay any taxes when you take the property as a distribution to use personally.

For more information contact Steve Linder, marketing manager for Pacific Lots of Costa Rica www.PacificLots.com, the largest expat development in Costa Rica and located in the southern Pacific region of the country. Now in their 22nd year, Pacific Lots is the largest seller of real estate, ocean view home sites and custom homes and properties for expats in Costa Rica. Click here to request more information.

Steve Linder is the marketing manager for Pacific Lots of Costa Rica, the largest expat development in Costa Rica and located in the southern Pacific region of the country. Now in their 22nd year, Pacific Lots is the largest seller of real estate, ocean view home sites and custom homes and properties for expats in Costa Rica. Click here to request more information.