San José, Costa Rica, since 1956

Buy Real Estate in Costa Rica with IRA Funds

IF you are looking at real estate inCosta Rica, or for a way to get betterreturns in your IRA, here is a little secretyour stockbroker will never tell you about:The IRS lets you purchase real estate withincome that is tax-deferred. This meansmany savvy investors are investing theirIRA funds in real estate.This is a great way to beat the ups anddowns of the stock market, diversify yourportfolio or provide a stable income as youtransition from riskier investments.HOW can you do this?The rules governing ownership of realestate in Costa Rica in this regard are simple.First, you may purchase practically anyreal estate you can imagine: raw land, condos,office buildings, single- or multi-familyhomes, apartment buildings or improvedland. You can also own a fraction of realestate, with other entities or investors owningother fractions. You can purchase anoption on the real estate or you can buy itoutright using a land trust, limited liabilitycompany or similar entity. Also, you canroll over your IRA, so you are buying thereal estate with retirement assets.THE one exception is that you can’tuse the Costa Rican real estate in your IRAas your residence or vacation home if youare under 59 and a half years of age. Thisis logical, since your retirement funds aretax deferred and are meant to be used foryour retirement. In other words, it can beany kind of property, but you can’t use itpersonally, unless you are already retiredand take the amount as a distribution.Your business can’t lease space in yourIRA-held property, nor can you place realestate that you already own into your IRA.Also, your spouse, parents or childrencan’t have been the previous owners of thereal estate. Property owned by siblingsmay be allowed, since the InternalRevenue Code (section 4975) specifies thatonly “lineal descendants” be disqualified.YOUR IRA custodian must actuallybuy the real estate you are investing in. So,the title will really be in their name, notyours. You may put up the deposit withyour personal funds, in order to reserve theproperty until the legal structure is in place;in this case, you have to be sure to includethat amount in the total due, so you get yourmoney back from your IRA at closing.You will need to work with an independentIRA custodian that allows realestate investments to set up an IRAaccount. Most banks and brokerage companieslimit your choices to products theysell. However, section 408 of the InternalRevenue Code permits individuals to purchasereal estate with funds held in manycommon forms of IRAs, including a traditionalIRA, a Roth IRA and a SimplifiedEmployee Pension plan (SEP IRA).To find a custodian that specializes inreal estate, search under terms such as “realestate IRA” or “self-directed IRA.” InCosta Rica, your realtor or the developermay be able to help you find a reputabletax attorney or organization to assist youwith this.You can’t serve as the custodian ofyour own account. It is important to selecta custodian knowledgeable about the typesof investment you’re interested in, becausethe custodian holds title to the real estate. Itis vital you find a custodian who will permitforeign property or leveraged property.IF the property is financed, you muststructure the purchase correctly to avoidadverse tax consequences down the road.Also keep in mind that if the property isleveraged, the debt must be a non-recoursepromissory note. But it is possible for yourIRA to take on a debt. Another way is topurchase an interest in the property alongwith others, such as a spouse, businessassociate or friend.Because all property expenses, includingtaxes, insurance and repairs, must bepaid from funds in your IRA, you’ll needliquid funds available in your account. Ofcourse, all income generated from theproperty will be deposited into your IRAaccount, so you could use that money tocover your costs. Or you can make annualcontributions within federal guidelines:$3,000 annually to a traditional or RothIRA ($3,500 if you’re 50 or older), and asmuch as 25% of your annual compensation– up to $40,000 – if you’re a self-employedindividual with a SEP IRA. If your accountdoesn’t have funds to cover propertyexpenses, you will have to withdraw theproperty from your IRA and pay taxes onthe value of the property, as well as possiblepenalties for early withdrawal.IF you decide to sell, the buyer cannotbe a family member. Once a deal closes,your IRA account now holds the cash –ready for you to make your next move. Agreat way to build up your retirement fundis to sell property with seller financing soall payments made by the buyers are paidto the IRA.You can withdraw real estate in CostaRica from your IRA and use it as a residenceor second home when you reachretirement age (59 and a half or older for apenalty-free withdrawal). Either the IRAcan sell the property, or you can take an inkinddistribution of the property. In thiscase, your IRA custodian transfers theproperty title to you.If you expect the property to appreciateand you want to eventually take it as a distribution,the Roth IRA is your best vehicle(see sidebar). Whether your retirementstrategy is to hold properties or buy andsell for gain, real-estate investing throughyour IRA can yield extraordinary returnstoward your future retirement.Russ Martin is marketing coordinatorfor the American-European Real EstateGroup; visit www.American-European.netto see over 500 properties in Costa Ricaand 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 beginwithdrawing 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 areal estate investment in an IRA and hold it for a long period, this is probablyyour 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 onthe current value of the property when you sell it or take it as a distribution. Witha Roth IRA, you won’t owe taxes at distribution; this is the best way if you anticipateyour 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 isless. However, keep in mind that if you have employees, you must make contributionsfor them as well. This option is a great alternative for real estate practitionerswho can make higher contributions, because they can build up fundsmore rapidly to purchase properties. Withdrawals from a SEP IRA are treatedlike those of a traditional IRA for tax purposes.

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