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.