Own International Real Estate With Your IRA/401(k)
Larry C. Grossman, is the managing director of Sovereign International Pension Services, Inc. He has over 25 years experience and was one of, if not the first financial advisors in the country to develop a compliant method for assisting clients interested in moving their qualified IRA and pension plans offshore for asset protection and greater investment diversification.
Contrary to what you probably have been told by your broker or banker, you can own real estate in your IRA, including non-U.S. real estate. Over the years, advisors have wrongly convinced many people they cannot own real estate, as well as a number of other alternative investments, inside their IRA’s or other retirement plans. Nothing could be further from the truth. In actuality, the IRS allows a great deal of flexibility when it comes to investing the assets of your retirement account.
The trouble comes if you don’t have a “self directed” IRA or if you work with a custodian who imposes his own investment restrictions. Most of these restrictions have nothing to do with the code governing retirement accounts but are instead employed to make life easier for the custodian.
What’s allowed—the real skinny
The truth is, the rules governing the ownership of real estate are simple…and you can own virtually any kind of real estate you could name in your IRA or other retirement account, including:
• Raw land
• Office buildings
• Single-family homes
• Multi-family homes
• Apartment buildings
• Improved land
Prohibited transactions and self-dealing
The IRS has some simple and straightforward rules that define what you cannot do. A simple rule of thumb is your retirement plan is meant to benefit you at retirement and not before. You may not, therefore, directly or indirectly, deal with yourself or a 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 a disqualified individual. In other words, you can invest in any type of real estate you want as long as it is an investment and not for your personal use.
Let’s say you've found the retirement home of your dreams or the piece of property you would like to build it on. And, remember, as I’ve explained, the property can be in the United States or it can be located anywhere else in the world. When you retire you can take possession of the property, (in effect taking it as a distribution from your IRA or retirement plan). 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.
Of course you always have the flexibility to sell the property outright. If you keep the property and take it as a distribution you will be taxed on the value of the property at that time.
• You may not purchase the property from yourself.
• You may not purchase the property from family members, with the exception of siblings.
• Neither you, your business, nor members of your family may lease or live in any investment property owned by your plan.
• Only retirement funds may be used as the down payment or good-faith deposit.
• The title must be in the name of the retirement account.
• Fractional ownerships are allowed.
Who is “disqualified”?
The relevant IRC code disallows you to deal with yourself or a “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 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, again with the exception of siblings.
You should always understand all the rules governing investing with your IRA before proceeding.
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 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 in the future.
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. It's important to work with a company that has a lot of experience to ensure you do not violate any relevant codes or take any missteps that will cause tax problems for you later on.
We charge a one-time setup fee of $250 to establish an account. You will also be charged an annual IRA custodial fee based upon the value of your account.
SIPS has years of experience helping our clients purchase properties all over the world, as well as in the states.
For additional information, please contact our office.
Sovereign International Pension Services
Larry C. Grossman
1380 Alternate 19,
Palm Harbor, FL 34683
tel. (727)286-6237; fax (727)286-6239