Buying Foreign Real Estate With Your IRA Funds
April 17, 2011,Panama City, Panama: You can use your IRA funds to further an overall strategy of investment diversification by converting your traditional IRA into a Self-Directed IRA.
Also This Week: Why Diversification Offshore Has Never Been More Important Than It Is Right Now...Strategies For A Tax-Free Life...Offshore Banking For Virgins...
Dear Overseas Opportunity Letter Reader,
If you've got a little money to invest right now, what should you do with it?
As Lief and I continue to pursue our general we-prefer-to-be-completely-diversified-offshore strategy, we're asking ourselves this question. The capital on the table has been sitting in an IRA account that we would like to move beyond U.S.-based management.
We like real estate, especially, right now, productive real estate. This is fortunate, as, we understand, it's possible to use IRA funds for the purchase of foreign property...if you've set up what's called a Self-Directed IRA. That process (converting our traditional IRA to a Self-Directed IRA) is step #1 and under way. (If you're interested, you can find out more about how to do make this conversion here.)
Step #2 is agreeing what to buy with the funds once they've been made available.
Big picture, long term, Panama remains our preferred market. However, we're well invested here, with a rental apartment in the city, beachfront property on the Azuero coast, riverfront in Santa Fe, and land planted with teak trees in Veraguas and the Darien. Buying more property in Panama would hardly help with our diversification agenda.
Here, therefore, are other possibilities we're considering:
#1: An apartment in Medellin, Colombia. This would jibe with both investment and personal agendas. Current values in Medellin are absolutely a good buy, and the rental market is active and expanding, meaning we should realize a reasonable to good rental yield. Plus, we're bullish on this market overall and expect the current bargain per-square-meter prices to move up in coming years.
Thinking personally, this is a place where we want to be able to spend time, a good lifestyle complement to Panama City, and where we're planning to establish a satellite Live and Invest Overseas office...
#2: A fire-sale buy in Ireland. As I mentioned last week, an auction of distressed properties took place in Dublin on Friday. Overseas Retirement Letter Editor-in-Chief Lynn Mulvihill reported further on the sale this morning. Pubs, penthouse apartments, townhouses, and terrace homes, Lynn explains, traded under the hammer for 40%, 25%, even 15% of the values they'd sold for most recently before the bust. That's distressed pricing!
A second such auction is planned for July 6. Lief and I are considering coordinating our summer travel to allow a stopover in Dublin early July. This next auction is expected to include period houses, the kind of place we bought and sold in Waterford when we lived there...and that, as time passes, we think we might like to own again as part of our retirement plan.
This, though, would be a personal buy, not one for investment. Ireland has never been a market for rental yields, and there's no reason to believe the Irish property market is going to appreciate anytime soon. ..
#3: A productive land play in Brazil. We don't buy into the current frenzy of condo development and sales on the coast of Fortaleza. This pre-construction Tulipmania seems overly risky and fraught with hassle (as Lief details below). Meantime, however, Lief has identified a completely different kind of investment opportunity in Brazil, to do with productive land, that has his attention. (He's preparing a report for his Marketwatch members.)
This would be a pure investment buy, with no personal-use or -interest element...
The internal debates continue.
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P.S. What else this week?
As we cover the live, retire, invest, and do business overseas beat, we take a global view of taxation.
Most countries are relatively tax-friendly when it comes to retirees. That is to say, a foreign resident's pension or Social Security income is often not taxed locally.
Remember, though, that, if you're an American, you could owe tax in the United States on your retirement pension income; that tax obligation must always be considered as separate from and in addition to any local tax burden in your new jurisdiction.
In other words, if you're an American retired to Panama, while you'll owe no tax on your pension income in Panama, you could owe tax on it in the United States.
The fundamental point, though, is that, if this is the only income you'll have as a retiree overseas, then tax planning isn't an issue for you. For you, one jurisdiction is as tax-efficient as another.
Things get more complicated when you have passive (investment) or earned (wages or business, including self-employment) income to report...
"They understand, too, that every U.S. citizen must file a U.S. tax return every year, regardless where he chooses to reside.
"What many don't recognize, though, is that an American abroad can use a foreign corporation, in a zero-tax jurisdiction, to legally and legitimately reduce or even eliminate U.S. tax on his business income.
"Your first line of defense as a U.S. expat is the Foreign Earned Income Exclusion (FEIE), which excludes from U.S. income tax the first US$92,900 of wage or self-employment income earned by a U.S. citizen 'residing' in another country.
(Technically, you're 'residing' abroad if you're outside the U.S. for at least 330 days during any 365-day period or a 'tax resident' of a foreign country for a calendar year. Tax residency can be hard to define. For more on this, take a look here.)
"However, this is only the start of strategies available to you as an American abroad to reduce or even eliminate your annual tax bill. For example..."
The really bad news is that there's more hardship to come. Though the Bush tax cuts were temporarily extended late last year, an ever-mounting U.S. deficit will almost certainly lead to new tax legislation. The December 2010 extension was only a temporary reprieve.
From Jan. 1, 2013, Americans across the board are going to experience significant tax increases, leaving us all with less in our pockets.
And it's not just your finances that are at stake. Crazy new laws have been crafted to restrict and control the foreign investment activities of U.S. citizens. That's an attack on your personal freedoms.
Effectively, what this means is that the more assets you have in the United States, the less control you have over them.
So, if you really want to protect your wealth, now and for your future--and prevent your estate being reduced potentially to 30 cents on the dollar (it happens all the time)--you have one sensible course of action:
This is an idea whose time has come.
Opportunities for going offshore come in all shapes and sizes. But, generally speaking, going offshore involves moving your assets, your business, your banking--and, perhaps, yourself--to a safe haven...a place where it's harder for anyone to lay claim to what you've got.
Diversifying your portfolio into foreign investments, particularly foreign real estate investments, and foreign currency is another important aspect to going offshore.
If visions of precious metals locked away in the vaults of a faraway haven are enough to make your palms sweat, let me reassure you that going offshore isn't anything as cloak-and-dagger...or glamorous...as it may sound.
It's about legally defending what's yours in a way that makes it more difficult for creditors to attack. Offshore strategies include trusts, foundations, international life insurance, and owning a foreign bank account, to name a few. These are all legal ways for you to build a wall around your assets. Pretty boring stuff, really.
And you don't need to be a multi-millionaire to benefit from going offshore. You could get started by simply opening a bank account in a haven that offers continues to offer banking secrecy. This is the easiest and the most sensible first step.
Can't meet the minimum deposit of US$100,000 required to open an Austrian bank account? Then why not try Belize...
In this little Caribbean haven, you can open a private bank account today without depositing a single dollar. And you can set this up--and manage deposits and withdrawals--all from the comfort of your own home.
Opening a foreign bank account is just one of the important offshore strategies we'll be exploring at the Emergency Offshore Summit we're convening this September.
Your wealth is affected by all sorts of things that often you feel you have no control over.
But, I say again, you still have a card to play, and you still have time to play it. By going offshore, you get to hold on to more of your assets, to protect them so that they grow safely, even tax-free.
That's why we've planned this Emergency Offshore Summit before year-end in Panama City. With the help of an army of offshore experts, with, among them, many decades of experience using offshore strategies to protect assets, we'll look at the biggest risks to your wealth today...and then we'll show you how you can exercise control over each one so that you're able to keep and to enjoy more of what's yours.
The U.S. government has been taking steps to make it more difficult than ever for you to hold assets anywhere outside the United States. Starting Jan. 1, 2013, for example, U.S. citizens with foreign bank accounts may be forced to pay a withholding tax of 30% on transfers of funds to and from these accounts. This is one of the provisions of the recently amended Hiring Incentives to Restore Employment, or HIRE, Act. Foreign banks that fail to comply with these laws face huge penalties (and, at the same time, it's worth noting, no penalty at all if they mistakenly withhold the 30%).
How these new laws got mixed up in an employment act is beside the point. What matters is that the 20 or so pages of legalese related to the reporting of foreign holdings could be summarized in one sentence: The window of opportunity available to you to take advantage of overseas investing and banking options is closing.
Time is running out to take advantage of important opportunities to protect what's yours--before it becomes too difficult (and costly) to do so.
Here's the best step you can take to consider the best opportunities available for taking your assets, your business, and yourself offshore and for diversifying into foreign investments...
Also This Week...from resident global real estate investing expert Lief Simon:
I've warned you about the risks and the hassles of investing in real estate in Brazil before. Not because Brazil isn't an interesting market where there are profits to be made, but because it's not an easy market, not a market for a first-time or small, individual investor.
I was reminded of this this week, when I met with a friend who has been actively investing in the Fortaleza pre-construction market for the past three years. He's not a first-time foreign property buyer but has years of experience behind him. And he's a smart guy. Still, he's ready to throw up his hands. He's head-to-head right now trying to wade through all the potential risks and challenges I've outlined in the past as he prepares to take possession of some pre-construction condos he bought three years ago.
As he explained to me over rum and Cokes at the Bristol Hotel bar...
Issue #1: The publicized interest-free payment plans (50 to 100 payments) that he bought into aren't actually interest-free. The period of no interest runs only to the point of taking possession of the unit (maybe 36 months). After that, you either pay off the balance due (by producing the cash or obtaining other financing), or you begin paying interest to the developer.
Issue #2: Your payments are indexed to inflation in Brazil. My friend was aware of this fact. However, as he explained, the developers and the marketers showed him graphs from the official inflation-tracking agency in Brazil indicating that inflation has been nominal in recent history. The reality, though, is that his payments are increasing by 1%, 2%, and more per month. That could add up to an increase of as much as 25% over a year! The developers argue that the value of the apartment is going up thanks to the inflation, as well, so you're better off, but you are only better off if you paid in full up front.
Issue #3: The currency exchange rate. If you're making monthly payments in a period where the local currency is strengthening against your currency (in my friend's case the U.S. dollar), then your monthly payments are going up in terms of your currency...at the same time that they are going up in terms of the local currency thanks to Issue #2.
Issue #4: Getting your money out of the country. My friend hasn't sold any of his apartment investments yet, but he's trying to prepare for how to address the issue of repatriating his proceeds when he does. The party line is that taking investment funds out of Brazil isn't an issue if you've filed all the proper paperwork. However, my friend wasn't able to file all the proper paperwork with the bank because of several hiccups along the way...including not being able to open a local bank account where he could transfer funds for the purposes of making his monthly payments to the developer and the fact that, while he bought using a corporation, the funds came from a personal account. So he's worried. Those matters aside, other investors I've spoken with have had difficulty getting their money out of Brazil even though they have done everything by the book. In the end, it seems to come down to your bank and government whim as to whether or not (and how easily) you can repatriate funds.
Issue #5: Reselling your investment. This is the one issue my friend isn't worried about. He says the market continues strong in this part of Brazil and that locals can get mortgages. Therefore, he's confident he'll be able to sell his apartments when they are completed.
To what end?
Bottom line, he thinks he'll break even on these three apartment investments after taking into account travel expense, attorney fees, bank wire fees each month, etc. If he sees any gain, it will come from the currency.
Remember, my friend is an experienced international real estate investor. And he's hoping now to break even on this experiment. If he does it will be because he made course corrections with these investments along the way and was able to navigate his way through each hurdle.
This Fortaleza, Brazil, pre-construction market has been an enigma for me for the past three years. I've followed the marketing hype, and I've spoken with perhaps a dozen investors who've taken positions. I know of only one story where the investor was able to successfully resell and repatriate his profits...and, in that case, the investor didn't in fact repatriate the profits but arrange a sale to another foreign buyer outside Brazil so that the money never appeared on Brazil's radar.
I continue to try to understand and am investigating a new opportunity in this part of the world right now. (If it passes muster, I'll share the details with my Marketwatch members.)
Meantime, if you've bought pre-construction in Fortaleza, I'd love to hear your story. Hopefully it has a happier ending than the others I've heard to date.
True Confessions From Panama Expatriates
Panama right now stands as one of the world's top retirement, investment, tax, and entrepreneur havens.
It's a natural wonderland...where you can find everything from posh new seaside condos to peaceful and affordable beach homes fit for hammock retirement... from big-city high-rise apartments to getaway mountain villages where life centers around the daily market...
But is it perfect? Of course not.
Let us open your eyes to the good, the bad, and the ugly of living, investing, banking, and doing business in this much-talked-about little country. Only then can you set yourself up for success here.
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An Expert Guide To The Advantages And The Challenges of Investing In Real Estate Overseas..." Learn More
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Kathleen Peddicord is the founder of the Live and Invest Overseas publishing group. With more than 25 years experience covering this beat, Kathleen reports daily on current opportunities for living, retiring, and investing overseas in her free e-letter.
Her book, How To Retire Overseas—Everything You Need To Know To Live Well Abroad For Less, was recently released by Penguin Books.
Read more here.
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