Own Domestic and International Real Estate With Your IRA/401(k)
Larry C. Grossman is the Managing Director of Sovereign International Pension Services, Inc. Larry was one of the first financial advisors in the country to develop a compliant method fo assisting client move IRA's and pension plans offshore. He has more than 25 years experience and is the author of The Ultimate Reirement Protection Plan: A Step-by-Step Program for Taking Your IRA, 401(k), or Pension Paln Offshore, available on Amazon.com.
You can own real estate in your IRA contrary to what you may have been told by your advisor. The IRS permits a great deal of flexibility when it comes to investing the assets of your retirement account, including both foreign and domestic real estate.
Making these types of investments can be quite challenging if you don't have a "self directed" IRA. Many IRA custodians impose investment restrictions. Most of these restrictions have nothing to do with the IRS code governing retirement accounts but are instead designed to make life easier for the custodian or worse yet, they are there to steer clients into investments the custodian is compensated for.
What’s allowed—the real skinny
The truth is the rules are straightforward. You can own virtually any kind of real estate in your IRA or other retirement account including:
• Raw land
• Office buildings
• Single-family homes
• Multi-family homes
• Apartment buildings
Prohibited transactions and self-dealing
The IRS has some important rules that must be followed. They also define what you cannot do. There is a simple rule of thumb. Your retirement plan is meant to benefit you at your retirement and not before. Therefore, you may not deal with yourself or another disqualified person.
What does this mean? You can't sell a piece of property you personally own to your IRA or vice versa. In short, you cannot lend money, extend credit, or furnish goods, services, or facilities to yourself or another disqualified individual. You can invest in any type of real estate you want as long as it is not for your own personal use while inside of your IRA.
Let’s say you've found the retirement home of your dreams or a piece of property you would like to build on. Domestic or foreign real estate is permitted. When you retire you can take possession of the property or sell it. Taking possession of the property allows you to take it as a distribution from your IRA or retirement plan without selling it. Now that you own the property personally it's yours to use as you see fit. It's important to note you do not have to sell the property but you would still be responsible for the taxes due.
You can sell the property outright at any time. If you keep the property and take it as a distribution you will be taxed on the value of the property.
• You may not purchase the property from yourself.
• You may not purchase the property from family members, except for siblings.
• Neither you, your business, nor members of your family may lease or live in any investment property owned by your plan.
• Fractional ownership is allowed. (Partnering your IRA with other investors or IRA participants is permissible)
Who is “disqualified”?
The IRC code disallows dealing with yourself or another “disqualified person.”
This is a simplified version of the definition of a disqualified person.
1) An owner, direct or indirect, of 50% or greater of: (the IRA Participant is an owner)
• 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.
2) A member of the family, excepting siblings.
How To Own Real Estate In Your IRA
There are many ways to own real estate in your IRA. You can own the real estate fully or fractionally with other entities or investors. You can purchase an option on the real estate or you can buy it outright using a land trust, LLC, or similar entity.
You also have the flexibility of paying for the property in full using your retirement assets or you can finance it. You must take special care to structure the purchase correctly if the property is financed to avoid adverse tax consequences.
The down payment and an equivalent amount of the ongoing payments and expenses must come from the plan if the property is fractionally owned.
Taking on debt
If you wish to use your retirement plan to invest in real estate but do not have sufficient funds in your IRA, your IRA can incur debt. This debt/mortgage must be in the form of a non-recourse loan where the only recourse for default of the loan is the underlying real estate/property.
How do I do this?
The good news is you can find the property of your dreams anywhere in the world, purchase all or part of it with your retirement assets, and eventually take ownership of it—all completely legal.
For additional information, please contact the office at:
Larry C. Grossman
1380 Alternate 19,
Palm Harbor, FL 34683
tel. (727)286-6237; fax (727)286-6239