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Overseas Properties in a Real Estate IRA

Many of our clients are actively looking to diversify their retirement portfolios by using Self-Directed IRAs to invest in overseas assets. Often, this includes investing in foreign property using a Real Estate IRA.

Is it legal to purchase overseas property in an IRA? 

Yes, since the birth of IRAs in 1974, it has been legal to purchase and own overseas property using Real Estate IRAs. You can buy and sell properties, collect rent, and do anything you can do with domestic real estate in an IRA, provided you observe all the rules concerning prohibited transactions.

Can I take out a mortgage or borrow money to buy an overseas property for my Real Estate IRA

Yes, you can. You can borrow from any willing lender who is not a prohibited counter-party. Prohibited counterparts include yourself, your spouse, your children or grandchildren or those of your spouse, your parents and grandparents or those of your spouse, or any entities any of these people control.

If you do take out a mortgage, it must be on a non-recourse basis. That is, you cannot sign a personal guarantee for the loan. Any collateral for the loan must come from within the IRA itself.

You should also be aware of any local laws and regulations that may affect mortgages in the country in which you are investing. Most other countries will not recognize your IRA as a legal entity.

How can I purchase an overseas property using a Real Estate IRA

To buy property for a Real Estate IRA, you need to establish an account with a custodian or administrator that will support self-directed/real estate transactions ahead of time. You cannot buy the property yourself, thinking that you can transfer it into your Real Estate IRA later. That would essentially be causing the IRA to purchase the property from yourself, and that constitutes a prohibited transaction.

Instead, set up an account in advance with American IRA, LLC, and fund it. In most cases, clients fund their Real Estate IRAs using rollovers from existing IRA accounts. You can also contribute up to $5,500 in new money per year to a Traditional or Roth IRA. If you are over age 50, you can contribute another $1,000 in catch-up contributions.

If you want to make larger contributions, and you have a business or self-employed income, you may consider setting up a small-business retirement plan like a SEP IRA or a Solo 401(k).

Set up a trust or local entity in the host country. 

Most countries do not recognize IRAs as a separate legal entity. That means that while you may have limited liability protection in the United States, you will not have any in the property’s host country. If a tenant sues you in local courts, they could go after you personally, and possibly seize other assets you own within the country.

Consider having a local attorney help you set up a limited liability entity that will help you limit your liability, just as you would set up a corporation or LLC within the United States to protect your personal assets if someone should sue the business.

Purchase the property. 

Again, it is best not to try to handle the transaction yourself, directly. Instead, send all necessary documentation and instructions to American IRA, LLC, to purchase the property on your behalf, using funds within your funded Self-Directed IRA account. Verify the purchase was completed correctly.

Note, the property cannot be titled in your name directly. The title has to go to your IRA, or to the entity within the IRA, with your IRA listed as the owner.

Disqualified parties may not reside in the Real Estate IRA property. 

Unless you are ready to withdraw the entire property from the IRA, and pay taxes on the transaction, you, nor any disqualified person to your IRA can physically stay in the property; even if market rent is paid.  You cannot use an IRA to own your own vacation home overseas. If the IRS finds out, they could force you to take the entire value of the account as a distribution, costing thousands in taxes, penalties and legal bills.

Return of Stock Market Volatility Underscores Need For Self-Directed IRAs and Diversification

February 2018 has been a stressful month for stock investors. Volatility is back with a vengeance: The Dow Jones Industrial Average components – what we used to call “blue-chip stocks” for their safety and staidness, took some big stumbles early in the month. This happens every once in a while, – but this time the declines triggered some program trading, computers were programmed to dump stocks as soon as the Dow, S&P 500 or some other signal dropped below a given level. The selling forces stocks lower, triggering even more program trade selling, and so a vicious cycle takes over.

And that, despite an economy that is prospering by most metrics, is how the Dow recorded a record 1,175 point loss on February 8th.

One might call it a reaction to a bull market that stockholders have appreciated over the last year. While we have seen a recovery since then (and stocks are setting new highs), the recent volatility has hopefully reinstated a healthy appreciation for risk: It is pretty scary to see 5 to 10 percent of your retirement nest egg disappear in a couple of days. Volatility can hurt.

Fortunately, the vast majority of our clients did not need to bat an eyelash. Indeed, some of them may even benefit from the volatility, as investors dump stocks looking for safer assets.

Self-Directed Investing means you do not have to worry about what the stock market does every day. Many of our clients have much of their long-term money invested in far more sound assets than stocks such as:

  • Rental properties
  • Commercial real estate
  • Tax liens and certificates
  • Gold and precious metals
  • Closely-held companies, LLCs and partnerships
  • Farms and ranches
  • Land
  • Private equity
  • Venture capital
  • Private lending
  • Mortgage lending
  • Equipment leasing

… and more.

While the value of each of these investments fluctuate, none of them are tied to the day-to-day fickleness of the stock market. Our clients have the luxury of being indifferent to most of the noise on Squawk Box and Jim Cramer’s Mad Money.

Most mature investors regard shows like these as a waste of time. The smart money is always way ahead of what the average consumer sees on TV.

As television and radio personality Dave Ramsey is fond of saying, “investing is a crockpot, not a microwave.” That is the approach taken by most Self-Directed IRA owners, who define holding periods in terms of years and decades, not hours and days. The longer your holding period, and the longer your investment time horizon, the less you have to worry about short-term volatility.

For alternative asset investors, there is no daily price index to track – and certainly no intra-day prices to obsess over. The focus is on the intrinsic value of the investment, and not on the opinions of millions of strangers – most of whom are not very smart anyway.

The lack of intraday pricing, and an overall more deliberate approach to investing and valuation, makes it much easier to avoid falling into the many traps of stock market speculation such as:

  • Focusing on the short-term
  • Panic selling on an impulse
  • Program trading causing you to sell when you should be buying
  • Thinking you are diversified when all your assets tend to move together

For many of our investors, the lack of correlation with the fickle stock market is a source of comfort. They derive piece of mind, knowing however fearful the talking heads on TV are behaving (generally at the wrong times), they do not have to participate in any correction or bear market.

Diversification is a fundamental principal of sound investing. Most individual investors do not do nearly enough of it, and find themselves over-exposed to a volatile stock market at the wrong time.  Self-Directed IRA strategies help you diversify, providing a much-needed hedge against stock market volatility – while still exposing you to opportunities for long-term growth and income.

If you want to do a thorough portfolio review, and find out how you can benefit from implementing Self-Directed IRA strategies in your own retirement investing, call us today at 866-7500-IRA(472).