Start Using Your IRA to Invest in Foreign Real Estate
How To Take Control of Your Own Financial Future
Investing in offshore real estate is a far cry from the boring Option A, B, or C type investment choices most custodians offer. It’s exciting. It’s outside the box. It gives you complete freedom over your funds and your future. And it offers incredible investment potential that no traditional option could ever rival.
Where Traditional IRAs Went Wrong
Having Someone Else Manage Your Funds Isn’t Safe Anymore
Meet the Self-Directed IRA
Don’t Let the Self-Directed Option Scare You
Freedom: The Biggest Benefit to Self-Directed IRAs
Why Brokers Can’t Offer Non-Traditional Options
Why Real Estate Is a Great Option for Self-Directed IRAs
Invest in Something You Can Really Feel a Part Of
Partner with a Trusted Professional
So How Does All This Work?
Some Important Considerations for IRA Real Estate Transactions
- IRAs are individual accounts. As a result, involving your spouse or other family member would require a joint ownership between your individual retirement account and the other entity(ies) of your choice. The good news is you can literally own the property with as many other entities as you want.
- You can’t always convert an IRA through your current employer into a self-directed IRA. While it’s always possible with a prior employer, check with your HR department to see what your options are at your present company.
- Traditional mortgages aren’t available for real estate in an IRA. If you don’t have the money to buy the property outright you’ll need to consider a partnership or other joint arrangement. If you must borrow money, it will be a non-recourse loan using the property itself as collateral. These are often difficult to find and have higher interest rates. In addition, any income earned on the debt-financed percentage of the property is subject to Unrelated Business Income Tax (UBIT), though there are perfectly legal techniques (UBIT Blocker Corporations) for mitigating these taxes.
- You will not be able to deduct the depreciation on real estate in an IRA. While this is typically a write-off for rental properties, the deduction does not apply in this case. However, any rent being collected is also not taxed until distributions begin, so the two may offset.
- All repairs, taxes, and other fees must be paid from the IRA. This includes everything from property taxes to homeowners’ dues. As a result, you’ll need enough liquid funds in the account to cover any costs. While most IRAs allow a maximum annual contribution (generally $5,000), it might not always be enough to cover any expenses. You also can’t do your own repairs, as your “sweat equity” is considered a contribution.
- Likewise, all income generated by the property must also remain in the account. This includes rental income, as well as capital gains from the sale of a property. This money, along with any additional contributions, stays there, tax-deferred (or tax-free if it’s a Roth), until you reach retirement age. This is especially beneficial if you anticipate being in a lower tax bracket at retirement.
- Neither you nor your family can benefit in any way from the property owned by the IRA. For example if you let your daughter live o’in the property or if you get rental income from it directly, you could invalidate the status of your IRA account and become subject to penalties. Likewise you yourself can’t live in the property, lest the entire value be deemed as a distribution. Upon reaching age 59 ½ (or earlier with a 72T election), you may begin taking annual distributions. The property could subsequently be retitled each year to reflect the new ownership percentage.
- You alone are responsible for maintaining adequate records to document your use of funds and investment returns. Your custodian will complete an account valuation and report the necessary information to the IRS. However, as the one who holds the checkbook, you carry the burden of proving where any money went.