by ZEWSThere are several prohibitions on how real estate can be purchased and used with IRA funds. Therefore, you should know about those IRA limitations. The IRS rules require the IRA-owned real estate to be for investment purposes only. You cannot receive funds from your self-directed IRA without penalty until you reach 59 ½ years.
Today, at LandCo we will help you understand what those limitations are so that you avoid problems in the future.
Limitations to investing in real estate in Costa Rica
Self-directed IRA
You cannot purchase real estate with a traditional IRA, only with a self-directed IRA. Nonetheless, if the self-directed IRA is set up incorrectly, you could be liable for unexpected tax liabilities or penalties.
Investment only
The IRS only allows real estate owned by your self-directed IRA to be used strictly for investment purposes.
Property Title
The property title comments must show that the title is in the name of the IRA and not in your personal name. In this case -and this is the one we care the most -, is to put the property into a Costa Rican LLC (or SRL as commonly known in Costa Rica) in which the shares will belong to your SD/IRA entity-
Prior Ownership
You cannot sell, lease, or exchange property you own personally to your real estate IRA. Doing so is called “self-dealing,” which the IRS strictly prohibits.
Disqualified Persons
IRS rules prohibit using IRA funds to purchase real estate from a disqualified person. The rules prohibit disqualified people from using any real estate purchased with IRA funds, like a home or business. The key to understanding the primary prohibition is the term “disqualified persons.” This term is used to refer to the IRA owner and related persons – meaning:
- The IRA owner and spouse
- Ancestors (mother, father, and grandparents)
- Descendants (children, grandchildren, and their spouses)
- Including the IRA owner’s investment advisers
- Including any IRA funds trustee
- Any business in which a disqualified person has a 50 percent or greater interest.
Vacation rental investment
You and your family cannot stay there if the property is a vacation rental – Airbnb, VRBO, and others – even when not rented.
Now, there are other factors or conditions that you must take into account when investing in real estate with IRA funds in Costa Rica:
Expenses
Always ensure you have enough money in your IRA account to pay for your investment’s expenses. These include repairs, utilities, property taxes, HOA fees, and insurance. You must pay those expenses from the IRA account, not your personal account.
Improvements
Are you a handy person and love doing it all yourself? Sorry, but you need to hire someone to remodel or repair, as you’re not allowed to do that yourself.
UBIT
If you take out a non-recourse loan secured by the property, you’ll have to pay unrelated business income tax (UBIT) on any profits related to the financed portion. You can reduce or eliminate your tax bill by using depreciation and operating costs.
Return on Investment
Over the years, we have sold many properties to clients using pension funds and retirement savings plans. It’s important to understand that the ROI on a rental property here will be between 5 – 6% on long-term rentals and twice that on vacation rentals.
As per the specific procedure and basic outline, please take a few minutes to read our proposal in these situations:
Those individuals who want to use their individual retirement accounts to invest in Costa Rica real estate was first set up a self-directed IRA. That’s the first step to do that you must have on board a custodian and IRA custodian that understands and works with international investments such as overseas investments and realistic once your account is funded, and the funds are in the custodian account.
Then you can invest in Costa Rica real estate then the next step is for you to establish a Costa Rican LLC, the LLC will be the vehicle by which the investment is made in Costa Rica. Generally, the typical scenario we were asked to participate in is when an individual has located an investment property that they want to invest in. Generally, these are vacation rental homes that generate income from vacation rentals, and the investor who is to purchase that real estate takes over that rental income in the name of their retirement account when considering the use of their individual retirement account for the purchase of real estate in Costa Rica.
For example, we always advise that you get your US CPA involved in the transaction. That way they can advise you as to the US consequences, prohibitions, and restrictions of any of the use of the IRA in Costa Rica.
Contact us if you need more info about real estate legal issues in this beautiful paradise. We are experts in how to invest effectively in Costa Rica.