Although the IRA as we know it is a purely American construct (it was invented by Congress in the Employee Retirement Income Security Act of 1974), there is no reason your investing interest needs to stop at the border or the water’s edge. It is quite legal for your Self-Directed IRA to hold assets that are overseas. This includes Real Estate IRAs – it’s very much legal for Real Estate IRAs to take on direct ownership of property outside of the United States and its territories. In fact, unless you are violating a sanction regime that’s in place by force of law, you can own real estate anywhere in the world.
Taxation of Overseas Investments
If your overseas real estate within an IRA generates rental income or sells property at a profit, all U.S. taxes are deferred. You are generally free to reinvest that money within your IRA free from federal income or capital gains tax until you start taking distributions from it. However, there are two exceptions to that rule:
- The country in which you hold these assets may not recognize the unique tax status that the IRA holds under American law. The host nation government may well assess a tax on rental income, capital gains, transfers or anything else they like. You will also likely be liable for property or land taxes as the host nation government may direct. In some cases you will fall directly under the host nation laws that apply to their own citizens. Or your taxation will be determined by one or more tax treaties the United States has with the host country.
Obviously, this can be a very complicated and specialized area of law. It is vital that you have competent legal and tax advice specific to the jurisdiction in which you want to invest.
2.) If you have directed your IRA to borrow from outside the account in order to finance your investments, you may be liable for a special tax called “unrelated business income tax.”
- When you take distributions from a traditional IRA (or other tax-deferred account such as a self-directed 401(k), SEP IRA or SIMPLE IRA), you must declare those distributions as income on your individual tax return. This is true even if the money does not enter the United States. Generally the U.S. requires you to declare any overseas income “from whatever source derived.” Unless the U.S. has a tax treaty in force with the host nation country that says otherwise, anything you take out of that IRA overseas is reportable as ordinary income.
In the case of Roth IRAs, the distribution is free of U.S. income tax (provided the money has been in the account for at least five years). Again, you may have to pay taxes in the local environment. Check with your local tax advisor for specifics related to the host country.
Generally, however, taxes you pay to a foreign government are tax deductible for the purposes of filling out your own individual tax return.
[tweetthis twitter_handles=”@iraexpert” hidden_hashtags=”#RealEstateIRAs”]It’s legal for Real Estate IRAs to own property outside United States…[/tweetthis]
We reiterate, it is critical that you retain a qualified tax advisor who is expert on the host nation jurisdiction and the interface with U.S. law. American IRA, LLC is a third-party administrator of self-directed IRAs, including Real Estate IRAs. As such, we do not provide tax advice. Instead, we work closely with your team of advisors to ensure that your instructions regarding your investment decisions are carried out and conform to all applicable U.S. laws and regulations.
Want more information about investing in overseas real estate? Call American IRA, LLC today at 866-7500-IRA(472), or visit our extensive online library of information at www.americanira.com. We are eager to work with you.
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