How to Use a 401(k) or IRA to Buy Real Estate Overseas
I’ve purchased overseas property using IRA funds, and I’ve known many others who’ve done the same without trouble. However, I’ve also met quite a few who have missed out on good opportunities and some who’ve undertaken the idea only to give up on it after getting off to a clumsy start.
Here are five tips to help make sure that, if you decide to tap your IRA or 401(k) to diversify into overseas property, your experience is a success.
1. Set up your IRA or 401(k) well before you need it. Say you’re traveling in Belize, and, after exploring for a few days, you identify a perfect property that you’d like to buy. You don’t have the available capital, but you do have enough in your IRA. You contact the seller and agree on terms. Then you return home to convert your traditional IRA to a self-directed IRA.
Two months later, after your self-directed IRA and its companion limited liability company have been established, you get in touch with the seller again to say you’re ready to close on the purchase. He responds to say that he decided to sell to someone else with ready funds.
Unfortunately, this is a common story. The moral is not to underestimate how long it takes to set up a self-directed IRA or 401(k). While it’s true that a 401(k) can be set up in a day, it can take several weeks to complete a rollover and get it funded. You’re unlikely to be able to set one up fast enough to take advantage of a time-sensitive offer if you haven’t at least begun the process ahead of time. And it’s illegal to use non-IRA funds to hold the property while the self-directed IRA is being set up. You have to set up your self-directed IRA or 401(k) before you need it, so you’re ready so strike when an offer presents itself.
2. Choose the opportunity. Once you have your 401(k) or IRA set up, consider the options for a property purchase overseas. You can’t use the property for personal use, so you don’t have the conflict that can come when trying to balance the attributes of a good second home or retirement residence with a good rental property. When buying a property with your retirement plan, remember that its only purpose is to generate income or realize a capital gain. You cannot live in the property yourself, not even part-time.
3. How you title the property can cause delays. You can’t use retirement funds to buy a piece of property and then title the property in your own name. You must take title in the name of your IRA, its LLC or your 401(k) trust. That sounds straightforward enough, but can be a problem when the country where you’re buying doesn’t recognize the type of entity you need to use for the purchase.
Many countries recognize the LLC and can put a LLC on a property title. This is generally a good option, because you can create LLCs cheaply and easily in the United States, even online. But if you’re using a 401(k) without a LLC, then titling could be an issue. Colombia and Uruguay, for example, don’t recognize a “401(k) trust”, meaning attorneys in these countries don’t know how to tax one or hold it accountable to the law.
Finally, consider the tax consequences before setting up an entity with which to hold property. In Uruguay, for example, foreign corporations are taxed at a lower rate than local corporations to attract foreign investment.
4. Don’t go overboard setting up financial structures and companies. There’s no award or benefit for complexity. On the other hand, complexity comes at a cost. Create only what you need to accomplish what you’re trying to accomplish. Don’t set up a Belizean trust and a Panamanian corporation with a Swiss bank, when a $69 LLC from Nevada will do the job.
5. Don’t live in your IRA property. You cannot live in, use or benefit from a property owned by a tax-deferred retirement plan. Only your IRA or 401(k) can benefit, not you.
Over the years, I’ve known people who have come up with creative workarounds, all of which had one thing in common – they were illegal. The penalties for stretching the law on prohibited transactions are severe. You could have your IRA or 401(k) disqualified, making all of the tax immediately due and possibly retroactively due, back to the time you bought the property. And that’s aside from any penalties that could be imposed.
Source: money.usnews.com
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