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Buy Real Estate in Costa Rica with IRA Funds Tico Times Staff - February Friday 2005

IF you are looking at real estate in Costa Rica, or for a way to get better returns in your IRA, here is a little secret your stockbroker will never tell you about: The IRS lets you purchase real estate with income that is tax deferred. This means many savvy investors are investing their IRA funds in real estate. This is a great way to beat the ups and downs of the stock market, diversify your portfolio or provide a stable income as you transition from riskier investments.

How can you do this? The rules governing ownership of real estate in Costa Rica in this regard are simple. First, you may purchase practically any real estate you can imagine: raw land, condos, office buildings, single or multifamily homes, apartment buildings or improved land. You can also own a fraction of real estate, with other entities or investors owning other fractions. You can purchase an option on the real estate or you can buy it outright using a land trust, limited liability company or similar entity. Also, you can roll over your IRA, so you are buying the real estate with retirement assets.

The one exception is that you can't use the Costa Rican real estate in your IRA as your residence or vacation home if you are under 59 and a half years of age. This is logical, since your retirement funds are tax deferred and are meant to be used for your retirement. In other words, it can be any kind of property, but you can't use it personally, unless you are already retired and take the amount as a distribution. Your business can't lease space in your IRA held property, nor can you place real estate that you already own into your IRA.

Also, your spouse, parents or children can't have been the previous owners of the real estate. Property owned by siblings may be allowed, since the Internal Revenue Code (section 4975) specifies that only "lineal descendants" be is qualified. Your IRA custodian must actually buy the real estate you are investing in. So, the title will really be in their name, not yours. You may put up the deposit with your personal funds, in order to reserve the property until the legal structure is in place; in this case, you have to be sure to include that amount in the total due, so you get your money back from your IRA at closing.

You will need to work with an independent IRA custodian that allows real estate investments to set up an IRA account. Most banks and brokerage companies limit your choices to products they sell. However, section 408 of the Internal Revenue Code permits individuals to purchase real estate with funds held in many common forms of IRAs, including a traditional IRA, a Roth IRA and a Simplified Employee Pension plan (SEP IRA).

To find a custodian that specializes in real estate, search under terms such as "real estate IRA" or "self directed IRA." In Costa Rica, your realtor or the developer may be able to help you find a reputable tax attorney or organization to assist you with this. You can't serve as the custodian of your own account. It is important to select a custodian knowledgeable about the types of investment you're interested in, because the custodian holds title to the real estate. It is vital you find a custodian who will permit foreign property or leveraged property.

If the property is financed, you must structure the purchase correctly to avoid adverse tax consequences down the road. Also keep in mind that if the property is leveraged, the debt must be a non recourse promissory note. But it is possible for your IRA to take on a debt.

Another way is to purchase an interest in the property along with others, such as a spouse, business associate or friend. Because all property expenses, including taxes, insurance and repairs, must be paid from funds in your IRA, you'll need liquid funds available in your account.

Of course, all income generated from the property will be deposited into your IRA account, so you could use that money to cover your costs. Or you can make annual contributions within federal guidelines: $3,000 annually to a traditional or Roth IRA ($3,500 if you're 50 or older), and as much as 25% of your annual compensation -up to $40,000- if you're a self employed individual with a SEP IRA.

If your account doesn't have funds to cover property expenses, you will have to withdraw the property from your IRA and pay taxes on the value of the property, as well as possible penalties for early withdrawal. IF you decide to sell, the buyer cannot be a family member. Once a deal closes, your IRA account now holds the cash ready for you to make your next move.

A great way to build up your retirement fund is to sell property with seller financing so all payments made by the buyers are paid to the IRA. You can withdraw real estate in Costa Rica from your IRA and use it as a residence or second home when you reach retirement age (59 and a half or older for a penalty free withdrawal).

Either the IRA can sell the property, or you can take an in kind distribution of the property. In this case, your IRA custodian transfers the property title to you. If you expect the property to appreciate and you want to eventually take it as a distribution, the Roth IRA is your best vehicle (see sidebar).

Whether your retirement strategy is to hold properties or buy and sell for gain, real estate investing through your IRA can yield extraordinary returns toward your future retirement. Russ Martin is marketing coordinator for the American European Real Estate Group; visit www.American-European.net to see over 500 properties in Costa Rica and Panama.

Know Your IRA Options:

  • A traditional IRA lets you deduct annual contributions (currently set at $3,000, or $3,500 if you're 50 or older) from your income. However, once you begin withdrawing money, those funds will be taxed as regular income.

  • A Roth IRA gives you no deduction on your current contributions (again $3,000) but does allow you to withdraw funds tax free. If you expect to buy a real estate investment in an IRA and hold it for a long period, this is probably your best option, particularly if the property increases in value over that period. If the property was held in a traditional IRA, you have to pay income taxes on the current value of the property when you sell it or take it as a distribution. With a Roth IRA, you won't owe taxes at distribution; this is the best way if you anticipate your real estate investments will appreciate over time.

  • A SEP IRA is designed for self employed individuals and small companies. You can contribute up to 25% of your compensation, or $40,000, whichever is less. However, keep in mind that if you have employees, you must make contributions for them as well. This option is a great alternative for real estate practitioners who can make higher contributions, because they can build up funds more rapidly to purchase properties. Withdrawals from a SEP IRA are treated like those of a traditional IRA for tax purposes.

If you want more information about using IRA money to buy real estate in Costa Rica, please contact Las Olas Beach Community at toll free at1-888-273-9986. They have done this in the past and have procedures in place to guide you through the process.



The Tico Times is Central America's Leading English-Language Newspaper, covering news, business, tourism and cultural developments in Costa Rica and Central America.

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