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How to Buy Property in Costa Rica With Your IRA

Written by Posted On Tuesday, 28 December 2021 01:19
How to Buy Property in Costa Rica With Your IRA

Building an investment portfolio mix for your IRA can be overwhelming. Most people invest their retirement funds to build a portfolio of stocks. But, you should know that with your IRA funds, you are not limited to owning just stocks. You can diversify your portfolio by transferring IRA funds to a self-directed IRA and then invest in real estate where the underlying asset is a tangible piece of property. However, investing in real estate is not a guarantee that the property will appreciate or you will generate rental income, but it sure is a tangible asset that should appreciate over time.If you want to diversify your existing portfolio and have considered Costa Rican real estate, then you need tounderstand the basics of buying real estate in Costa Rica.

Self-Directed IRA

The IRS rules allow IRA funds to be invested in real estate, but they do not require the IRA trustee to offer real estate as an investment option. So, many IRA trustees, especially depository banks who offer traditional IRA investments, do not offer real estate investments because of the additional administrative burden of real estate management.

So, if you want to invest in Costa Rica real estate with your IRA funds, you may have to convert your traditional IRA to a self-directed IRA (SDIRA). A self-directed IRA gives you complete control over the investments in your IRA account. A self-directed custodian or trustee administers this account, and you get the flexibility to invest in a wider variety of investments, including a foreign real estate investment, such as Costa Rica.

With SDIRAs, real estate investments do not only refer to houses; they can be parking lots, boat slips, vacant lots, mobile homes, multi-family buildings, and apartments.

IRA Limitations and Restrictions When Buying Property in Costa Rica

The SDIRA is the property owner, and therefore, you or your beneficiary or any disqualified person cannot live in it or work for it.

A disqualified person includes the following:

  • You (the IRA owner) and your spouse
  • Descendants (children, grandchildren, and their spouses)
  • Ancestors (mother, father, and grandparents)
  • Your IRA funds trustee
  • Any business in which a disqualified person has a 50% or greater interest.
  • Your investment advisers

The IRS Rules

  • Your IRA-owned real estate is for investment purposes only.
  • If you are under age 59 ½, you cannot use it as a residence or a vacation home.
  • You cannot use the IRA funds to purchase real estate from a disqualified person.
  • A disqualified person cannot use the real estate purchased with IRA funds for personal or business use.
  • You cannot purchase a vacation home that is partly for personal use, and the rest is rented to others.
  • Costa Rica Tax Advantages

The most common reason why people invest in foreign real estate is for tax reduction. Many countries offer tax incentives to foreign investors to promote a healthy investment environment by attracting international wealth. For a small country with a small population and very few resources, getting international investors can drastically improve the economy. This strategy also helps the investors as it reduces their tax exposure.
For example, if the trustor is a resident of the US, the trustor status permits them to make tax-free contributions to their offshore trust. That said, the trustor of an offshore asset-protection fund is still liable to be taxed on the income generated by the trust. Moreover, because you are doing business as a corporation and not operating as an individual, and because the corporation is not engaged in local operations, there will be little or no tax imposed on the offshore corporation. You’ll find more details on the Costa Rica tax system.

Return on Investment (ROI)

ome people invest in Costa Rica real estate because most other investments, like the stock market or other markets, do not pay the same ROI as an investment in Costa Rica does. If you have your money invested in a rental property in Costa Rica, you can get a 6 to 10% ROI.

How Do You Set up a Self-Directed IRA to Invest in Costa Rica Real Estate

Step 1: Check whether your current IRA custodian has the knowledge to handle a foreign investment. If not, you will have to switch over to a custodian specializing in self-directed IRA and understandthe process, rules, and limitations of investing IRA funds into a foreign property purchase.

Step 2: Once you have set up the account, you can begin your property search. During this process, you will need an Attorney in Costa Rica that possesses the knowledge of IRA funding to assist you with the transaction. If you have to transfer property in Costa Rica, a Notary Public, who by law is also an attorney, has to be involved. The attorney will do the required title search to ensure that you get what has been promised to you.

In Costa Rica, it has become a common practice to have your real estate property investment owned by a Costa Rican corporation or LLC. An investment owned by the local LLC allows the transfer of the LLC membership ownership to your IRA Custodian. So, the actual owner of the LLC that owns the real estate is not you but your IRA.

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Rick Pendykoski

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed account 401(K), Self-directed account IRA and alternative investments. You can email him at rick@sdretirementplans.com or visit www.sdretirementplans.com.

https://www.sdretirementplans.com/
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