There are a few retirement fund prohibitions when using your IRA or 401(k) to purchase real estate that you should know about.
Many retirement fund owners don’t even know you can buy real estate in Costa Rica with your self-directed IRA (Individual Retirement Account) or your 401(k) (Retirement Savings Account).
Very few Costa Rica real estate agents know how you can realize the purchase without running into trouble. At GoDutch Realty, we do have the knowledge and can assist expertly.
First, you need the cooperation of your IRA custodian. Then you need to have a knowledgeable Costa Rican real estate attorney. And of course, a GoDutch Realty agent to assist in the purchase.
The IRS rules permit IRA funds to be invested in real estate. But they do not require an IRA trustee to offer real estate as an investment option. Many trustees who offer traditional IRA investments, such as depository banks, do not allow IRA owners to invest in real estate. That’s because of the extra administrative burden of real estate management.
As a result, you will have to convert your traditional IRA to a self-directed IRA. A self-directed IRA is an IRA that requires you to decide what investments to make yourself.
But, before you do all the wrong things, you need to know there are certain prohibitions on this type of purchase:
- The IRS rules require IRA-owned real estate to be for investment purposes only. Therefore, you cannot use it as a residence or your own vacation home if you are under 59 ½ years old.
- The key to understanding the main prohibition is the term “disqualified persons”. This term is used regarding IRA-owned real estate to refer to the IRA owner and related persons. This means that while you can partner with someone else, the disqualified persons are: The IRA owner and spouse, ancestors (mother, father, and grandparents), and descendants (children, grandchildren, and their spouses). These include the IRA-owner’s investment advisers, including any IRA funds trustee and any business in which a disqualified person has a 50 percent or greater interest.
- IRS rules prohibit the use of IRA funds to purchase real estate from a disqualified person. The rules prohibit a disqualified person from using any real estate purchased with IRA funds, as a home or business. These rules even preclude you from purchasing a vacation home that is only partly for personal use and otherwise rented to others.
Over the years, we have sold a lot of Costa Rica real estate through retirement funds and retirement savings plans. Our clients are US citizens planning to retire to Costa Rica in the future. They don’t want to have their savings invested in the stock market and earn a better and more secure ROI. If you invest your money in a rental property in Costa Rica, you can count on an 8 – 10% Return On Investment (ROI).
We are the leaders
Our former realtor in Atenas, Isabelle Jones, and her husband Howard, have used their self-directed IRA for investment purposes in Costa Rica. They have bought and sold many investment properties for over 10 years. They even developed a whole gated community. Isabelle and Howard have done extremely well investing their money, taking the retirement fund prohibitions into account.
Our proposal is really very simple: use your funds to purchase a building lot and sit on it until the values in the area increase. Or you can use a local builder and build a spec home.
Once you sell the land or the property with the house, your initial investment PLUS the profits roll back into your IRA account. Your US taxes are deferred. They will just stay in your IRA account until you decide to make the next real estate investment.
Talk to your custodian, attorney, and your realtor, and make sure you are aware of the prohibitions. Ready to see what we have to offer? Then contact us now so we can assist.
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I DO want to remind our readers that we appreciate any referrals you can send us. Also, please remember the GoDutch Realty agents when you talk about your home in Costa Rica, we appreciate it.