IF you are looking at real estate in Costa
Rica, or for a way to get better returns in your IRA, here
is a little secret your stockbroker will never tell you about:
The IRS lets you purchase real estate with income that is
tax deferred. This means many savvy investors are investing
their IRA
funds in real estate. This is a great way to beat
the ups and downs of the stock market, diversify your portfolio
or provide a stable income as you transition from riskier
investments.
How can you do this? The rules governing ownership of real
estate in Costa Rica in this regard are simple. First,
you may purchase practically any real estate you can imagine: raw
land, condos, office buildings, single or multifamily homes,
apartment buildings or 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 it outright using a land trust,
limited liability company or similar entity. Also, you can
roll over your IRA, so you are buying the real estate with
retirement assets.
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 and a half years of age. 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. Your business can’t lease space
in your IRA held property, nor can you place real estate
that you already own into your IRA. Also, your spouse, parents
or children can’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 descendants” be is qualified.
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 to include
that amount in the total due, so you get your money back
from your IRA at closing.
You will need to work with an independent IRA custodian
that allows real estate investments 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 (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, your realtor or the developer
may be able to help you find a reputable tax attorney or
organization to 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 you find a custodian who
will permit foreign property or leveraged property.
If the property is financed, you must structure the purchase
correctly 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.
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 into your IRA account, so you could 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 50 or older), and as
much as 25% 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. IF you decide to
sell, 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 all payments made by the
buyers are paid to the IRA. 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 (59 and a half
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 this 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, the Roth IRA is your best vehicle
(see sidebar).
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.
Russ Martin is marketing coordinator for the American European
Real Estate Group; visit www.American-European.net to see
over 500 properties in Costa Rica and Panama.
Know Your IRA Options:
- A traditional IRA lets you deduct annual contributions
(currently set at $3,000, or $3,500 if you’re 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 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% 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 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.
If you want more information about the best real estate
affordable, please contact Costa
Rica real estate and retirement properties or call toll
free 1 888 581 1786.
How to use IRA to invest
in Costa Rica Real Estate
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