The world is flat. Well, not technically, but some real estate investors have begun to diversify internationally into emerging markets which may offer increased investment returns for their IRAs. Our office has experienced an increase in real estate transactions involving Latin American countries such as Mexico, Costa Rica, Guatemala, Panama, Dominican Republic and Brazil. Underdeveloped countries can offer tremendous wealth building opportunities for real estate investors, but as with any investment, you have to educate yourself about the potential pitfalls so that you don’t expose yourself to unnecessary investment risk.
If you are planning to purchase property in the global markets using retirement plan assets, certain precautions should be observed. I have outlined a few areas for your consideration below.
The Venue – Country Specific Risk
Be completely familiar with the local rules and laws governing the purchase and disposition of real estate. Some country’s jurisdictions will not permit other nationals to purchase certain property. Deed restrictions are common. Be aware of how title is taken and make certain that your security interest is properly protected.
Real Estate Purchase Contracts
Carefully read any contracts to purchase property. The contract needs to be in the name of your IRA or retirement plan, not your individual name. It is highly suggested that you hire a local professional to ensure that what you think you are buying is what you actually end up with. Be certain that the tax burdens of the previous owner are not shifted to you as part of the sales agreement. Many of our clients choose to structure their IRA using “check book control” strategy via an IRA LLC to simplify the transactional hurdles commonly experienced by investing internationally with retirement funds.
Make sure that your IRA/Retirement Plan will be obtaining a deed. If you are lending money to a foreign entity with your IRA, and no deed is obtained, be aware that it will be considered an unsecured loan.
Income Expenses and Taxes
Your IRA and retirement plan tax deferrals do not operate outside the United States. Income may be taxed, and your IRA is responsible for paying those taxes. If you choose to pay such taxes directly, from monies outside of your IRA, such payment will constitute an automatic excess contribution and perhaps prohibited transactions, subject to penalties.
Income from sales may be taxed advantaged in certain jurisdictions if the proceeds are reinvested in another property under specific conditions. However, in other occasions the tax on income may be very high. It is important to know local tax laws and rules regarding income from sale of real property. Consulting local professionals will provide you with invaluable time and money savings.
Remember, your retirement plan assets are not limited to investment opportunities within the United States only. Global diversification can have a profitable impact in your real estate portfolio, however, use local professionals to assist you with your transaction and most importantly, educate yourself about the local tax and property laws before implementing a transaction.
For more information about Real Estate IRAs, please visit www.VantageIRAs.com/AZREIA
by J.P. Dahdah Chief Executive Officer
Vantage Self-Directed Retirement Plans