Investing In Foreign Real Estate

How To Buy Foreign Real Estate With Your IRA

Dec. 17, 2010, Panama City, Panama: It is possible to invest in foreign real estate using IRA or 401k retirement funds. First, you must establish what’s called a “self-directed IRA.”

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Dear Live and Invest Overseas Reader,

Most people understand that buying real estate overseas is a smart part of any asset-protection and diversification plan right now. Unfortunately, though, many people have the majority of their retirement funds and net worth tied up in some kind of retirement account, a 401k or an IRA, for example. And most custodians of these accounts don't allow for "non-traditional" types of investments like foreign real estate.

The important thing to understand is that it's not that you can't use your IRA funds to invest in real estate. It can be, though, that your custodian doesn't want you to...either because he doesn't want (or understand how) to deal with the required paperwork or, more often, because he makes more money if you invest in one of his preferred investment products.

To buy real estate--foreign or local--with your retirement funds, you have to set up what's called a "self-directed IRA" or "self-directed 401k." Entrust is probably the biggest and best known of the custodians for self-directed accounts, but they aren't the only one. Equity Trust and Lincoln Trust are two other options, but a search online for "self-directed IRA custodian" will get you a longer list of options.

When choosing a custodian for a self-directed IRA or 401k, you want to make sure that the program will allow whatever type of non-traditional investments you plan on making, including foreign real estate.

Maybe the best way to simplify how you invest your IRA/401k funds is to establish what a friend has dubbed a "checkbook" IRA.

To do this, you set up an account with a self-directed IRA custodian. Then you create a corporation, in which your IRA invests all its funds. Then you, as the president/manager of that corporation, invest the funds of your IRA as you like.

This structure allows you to eliminate the paperwork otherwise required each time you invest in something "alternative." You simply write a check from the corporate bank account to make the buy.

This structure is the most straightforward I know for using retirement funds to invest in real estate overseas. I've seen many people get far into the buying process and then hit a wall with their planned purchase when it comes time to title the property in the name of their IRA account, as is required for IRA investments. Most countries' legal systems don't know what an IRA account is, and they have no idea or no way to title a property in the name of such an account. They do, however, know what a corporation is, and titling a property in the name of a corporation isn't generally an issue anywhere.

One thing to remember when investing with a self-directed IRA is the self-dealing rules. For example, and broadly speaking, you can't have your IRA buy real estate from you directly. And you can't have your IRA buy a property and rent it out to your business. You'll want to take a look at the list of self-dealing rules to make sure you understand them. Note that there are many exceptions to the rules that allow you to do many things initially disallowed.

Also note that you can't use your IRA self-directed funds to buy real estate for personal use; the property must be an investment. You can't buy a vacation home with IRA funds, for example, and then spend three months a year using it.

However, you could buy a piece of real estate with the plan to rent it out until you retire. Then, once you do retire, you could take the property as a distribution from your IRA and move in...and live in it.

This concept works well for funds from a Roth IRA. You can let the rental income grow in the IRA tax-free, then, when you take the distribution of the property at retirement, that distribution is also tax-free.

Lief SimonContinue Reading:

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