Use your IRA to finance your dream property overseas

Monday, June 29, 2009

Dear Reader,
Today, more than ever, you need to consider international real estate as part of your investment and retirement planning. With credit tight at home and unavailable in many growth markets, you may have given up on this dream. But there’s a way to finance your new property in paradise…and you may not even know about it.

I’m talking about using your IRA to buy international real estate. The IRS is flexible and accommodating when it comes to doing this. You can do this as long as your IRA is “self directed” and you don’t work with a custodian who imposes his own investment restrictions.

Many Americans I know have already done this. Lisa Webber from Kansas followed her dream and bought a vineyard in Argentina. Today, she enjoys getting the income checks she generates from her vineyard. Michael Williams from California bought a tract of land in Panama in his IRA. He may flip or build on it—he hasn’t decided yet—but he’s enjoying having plans drawn up.

You can own pretty much any kind of real estate in your IRA or other retirement account. Everything from raw land to single-family homes to condos to office buildings, once the investment complies with some straightforward rules that outline what you cannot do. A simple rule of thumb is your retirement plan is designed to benefit you at retirement and not before. That means that you can invest in any type of real estate as long as it is an investment and not for use before your retirement.

You can buy your dream retirement home using IRA funds today. Once you retire, you can take possession of the property…in effect taking it as a distribution of your plan. Between now and retirement, your property can generate income for your plan by renting out the property. You can even collect a “reasonable fee” to manage the rental of your property or appoint an outside agency to manage this on your behalf. You can buy and flip properties within your IRA and you can even use your IRA to buy an option on a property or piece of land.

As you would expect, there are some requirements in addition to the requirement that the purchase be an investment. You cannot purchase the property from yourself, certain family members, or a “disqualified person”. A disqualified person is an owner, direct or indirect, of 50% or greater of:

• The capital interest of a partnership
• The total value of all shares of stock of a corporation including all classes
• The combined voting power of all classes eligible to vote
• A member of the family—with the exception of siblings

You (or members of your family) can’t live in or lease the property. Only retirement funds may be used as the down payment and title must be in the name of the retirement account.

There are even special exemptions to some of these limited requirements. In one exemption, a retirement plan was allowed to purchase the mortgage for the participant’s primary residence with plan assets.

You also have flexibility with ownership options. Your plan can take title, an option or can buy the property using a land trust, L.L.C., or similar entity. If you buy in a market like Panama—where local mortgages are available—your plan can borrow to finance the purchase.

International real estate continues to offer both diversification and growth opportunities. Diversify your investment portfolio from the U.S. economy and dollar into growth markets and appreciating currencies.

Real estate in Brazil, for example, continues to rapidly appreciate, while the last four years has seen the real (Brazil’s currency) strengthen in value against the U.S. dollar.

Figure overseas real estate and living overseas as part of your retirement plan and the returns can be even greater—a home and lifestyle beyond your wildest dreams.

In the village of Cotacachi in Ecuador’s highlands, $46,000 buys you a penthouse apartment. A couple can live comfortably here for $600 per month. Including an investment like this in your retirement plan is what my friend and International Living publisher Dan Prescher would call “bullet- proofing your retirement.” In turbulent times, you will certainly sleep better with an insurance policy like that under your bed.

Ronan McMahon