We now offer North American style financing on all of our properties.

Better Homes Costa Rica can offer you help in using your IRA to purchase real estate in Costa Rica. Please contact us for details.

If you are looking for an alternative way to finance your real estate purchase in Costa Rica, or to buy income producing investment property in order to diversify your portfolio, then your own IRA may be the vehicle you are looking for.

Although not many people know this, the IRS lets your IRA buy real estate as an investment. This property can be in the US, but it can also be located in Costa Rica. The procedure is straightforward, but there are a few necessary ingredients. You need:

• An IRA custodian that offers self-directed accounts and allows real estate purchases within those accounts.
• Real estate that you wish to purchase. The kind of property isn't really important raw land, condos, office buildings, single or multi-family homes, apartment buildings and improved land.
• You have to be aware of the limitations, such as you can't use the real estate as your residence or vacation home, unless you are 59.5 years old.

This is a great way to diversify your IRA investment portfolio and to take advantage of the opportunities in the Costa Rica real estate market.

More:

Commercial Real Estate Investing With Your IRA
by Phoebe Chongchua

A small but growing number of people are using their retirement funds to invest in commercial real estate in hopes of turning a bigger profit.
FREE Agent Online Powerhouse Kit including a FREE business consultation

While many are becoming aware of using IRAs to invest in residential real estate, investing in commercial properties seems to be utilized by a select few. And many more only think of an IRA as being associated with stocks, bonds, and mutual funds.

Investing in everything from single family homes to raw land, to commercial buildings is permitted with certain IRAs, provided that the real estate is not being used for your own personal use, such as a vacation home or an office for your business.

But getting started in this process can seem a bit overwhelming.

Larry Dalton, 44, recently consolidated his various 401k and IRAs to what's known as a self-directed IRA. Using a company called Asset Exchange Strategies, LLC, Dalton created a Limited Liability Corporation (LLC).

According to Daniel Cordoba, principal of Asset Exchange Strategies and a certified estate advisor in Texas, there are four basic benefits to doing this.

"First we give them transaction control. This means that they don't have to go ask a custodian to write a check for them every time they need some funds. Second, they don't have to ask the custodian for permission to buy a particular asset, as long as it's not a prohibited transaction... the third thing that the LLC provides for them is litigation protection... lastly, we've built relationships with these custodians, and offer the lowest custodial fees available," Cordoba explained.

Cordoba said the custodial fee is typically less than $190 per year to hold the asset. However, to set up the LLC, there is a one-time cost ranging from $1,900 to $3,000. The costs can be paid for with your IRA funds.

"So you don't really want to do this unless you have a good amount of money to invest... if you don't have that much to invest, I would say it's really too expensive to do, because obviously, you need the up-front costs," said Dalton.

"My advice would be to have $50,000 or more to invest, and once you have that amount of money, these costs, going long term, can be more than made up with the additional returns you get from investing directly in real estate."

If you're considering this option for your IRA, here are a few questions and answers that you should be aware of before beginning. For more details visit: www.MyRealEstateIRA.com.

Is financing real estate inside an IRA more complex?

"It's a myth that it's more complex. If you use the IRA LLC, it makes it no different from any other transaction. The steps are the same. The property is titled in the IRA LLC. However, there are more things to think about if you need to also get a loan," said Cordoba.

"You go about getting the loan, but you can't use the credit of the individual; you can only use the credit of the IRA, and that gives rise to some unfavorable tax situations (unrelated business tax). If there is income, you may have to pay taxes on the part of the income that is financed by debt," said attorney Bill Leighton, who is board certified in tax law and estate planning in Texas.

"It is always best if you can buy the property outright with the IRA. If you get a loan, you should get a non-recourse loan (that is the next best situation). There is the chance of incurring unrelated business tax. [People] need to determine with their tax advisor, if this is the appropriate structure to debt finance," said Cordoba.

Can you write off interest and depreciation on your real estate investment?

"You cannot write off interest and depreciation. Instead, you are getting your tax break up front," said Cordoba. "Basically, the LLC and the IRA is a tax-exempt entity, so there is no depreciation deduction," Leighton explained.

Can you invest with several people to purchase a property?

"Yes. We shall create two entities. We'll create what we call a purchasing entity -- and that's an LLC, or another entity structure that actually goes out and purchases the property -- and then we'll have several IRA LLCs underneath that purchasing entity," Cordoba said.

"Those several entities would be partners in whatever the purchasing entity structure is," Leighton said.

Using your IRA for real estate investments is growing in popularity because of the ability to actually control a portion of your funds. But a word of caution -- make sure you research and find experts to help you, diversify your real estate portfolio and be prepared for up-front costs and fees.

And more:

Commentary: The Self-Directed IRA
Daily Record and the Kansas City Daily News-Press, Oct 30, 2005 by Scott DeVouton

This article is intended to give a broader view of issues involved with investor use of self-directed IRA retirement investment accounts. In the Self-Directed IRA strategy, an IRA is used to invest in private real estate and business investment enterprises, with all common IRA benefits. Purchased assets include real property ownership rights, secured promissory notes, and ownership rights in various investment entities.

Counsel should be aware that Self-Directed IRAs are currently being marketed as an alternative to traditional, broker-based market investing. This strategy has legal support, and may provide an attractive diversity to an investor's retirement plan; real estate and estate planning counsel should understand various core issues.

Overview

The term, IRA, is familiar to most people. The Individual Retirement Account (Arrangement) has become a staple component of most financial plans. It has been referred to as the tax shelter of the people because of its great tax advantages and easy accessibility.

During the recent real estate boom, Self-Directed IRAs have gained popularity on the coasts. Sometimes called Real Estate IRAs, the Self-Directed IRA strategy has also been discovered by Missouri investors.

Real estate attorneys will begin to see more clients researching and using Self-Directed IRAs in everything from mom and pop duplex investments to multi-owner commercial developments.

Because Self-Directed IRAs involve the use of a common retirement planning investment tool, estate planning attorneys should also be aware of their application and limits.

Legal Principles

The term, Self-Directed IRA is not found anywhere in the Internal Revenue Code. While the strategy is firmly rooted in basic IRA law (26 IRC sec. 408), Self-Directed IRA is essentially a marketing term used to describe a particular organization of an IRA's fiduciary powers and duties.

An IRA is a trust. Under specific statutory language, an investor contributes an asset (cash) to the trust (the IRA account). The trust then directs its corpus to a particular investment, typically stocks, bonds and annuities.

This action of investing implicates a trustee who owes various duties to the IRA. Typically, a stock broker manages the account's investment (as a fiduciary) and serves as the IRA's trustee. The broker exercises virtually all fiduciary power in crafting the investment.

With a Self-Directed IRA, the investor keeps most of this power. He or she directs the investment, instead of a broker. A custodial trustee holds and administers an IRA account. The investor determines which investment(s) are appropriate for the IRA, and tells the custodian where to invest the IRA account.

Taking this a step further, the IRS does not put many limits on the types of assets in which an IRA may invest. Expressio unius est exclusio alterius. While IRAs typically invest in public stocks or mutual funds, Self-Directed IRAs commonly invest in real estate, private business entities and commercial paper. The only investments precluded by the IRS IRA statutes are life insurance, collectibles and certain prohibited transactions listed under 26 IRC sec. 4975.

An investor, therefore, can use IRA funds to invest in a real estate deal, a business, or a promissory note, presuming the transaction comports with IRS rules. Within that investment, any gains (or losses) accumulate with all IRS IRA tax advantages. In fact, all traditional IRA rules apply to Self-Directed IRAs, including contribution limits, tax deferral or exemption rules, and required minimum distributions.

The Self-Directed IRA strategy can be a dynamic addition to a retirement investment portfolio, but counsel must be aware of a few central issues.

Investor as Fiduciary

Most basically, counsel should underscore the nature of fiduciary power and duty to a client who wants to use a Self-Directed IRA. As the client chooses which investment is appropriate for his or her portfolio, the client also assumes responsibility for assessing risk. It is the client's responsibility to research, verify and analyze things like market conditions, valuations, financial projections, liquidity and legal parameters.

Fiduciary duty is a direct corollary of the power to self- direct. The client must understand the nature of this duty, and must ensure that no investment runs astray from important limits found in section 4975.

Section 4975 prohibits a fiduciary and other disqualified persons from engaging in a variety of transactions. Prohibited transactions include the sale or exchange, or leasing, of any property between a plan and a disqualified person, [4975(c)(1)(A)], the lending of money or other extension of credit between a plan and a disqualified person [(4975(c)(1)(B)], and the furnishing of goods, services, or facilities between a plan and a disqualified person [(4975(c)(1)(C)]. The receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan is also a prohibited transaction. [4975 (c)(1)(F)].

The definition of a disqualified person [(4975(e)(2)] extends into a variety of related party scenarios, but generally includes the investor, any ancestors or lineal descendants of the investor, and entities in which the investor holds a controlling equity or management interest.

Section 4975 also includes two catch-all provisions regarding the general fiduciary duty that the investor owes to the IRA. 4975 (c)(1)(D) and (E) respectively prohibit the transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan, and any act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account. The broad language of (D) and (E) sheds a light of caution for attorneys whose clients wish to invest using a Self-Directed IRA.

The U.S. Tax Court recently interpreted subsection (c)(1)(D) in Rollins v. Commissioner (T.C. Memo 2004-260, 2004). In that case, an investor directed his plan to loan funds via promissory notes to entities in which the investor held minority equity interests. The investor controlled the decision, on behalf of the borrowing entities, of whether to do business with the investor's retirement plan. Because the investor sat at both sides of the table, the IRS found a violation of prohibited transaction rules. Counsel should note that the success of the investment was not a factor in the court's analysis.

Rollins underscores the importance of the investor's fiduciary duty to the Self-Directed IRA. Counsel should generally watch for any possible conflict of interest with a client using the Self- Directed IRA strategy.

Self-Directed IRA Custodians

Counsel should note that the Self-Directed IRA custodian serves an important role in this strategy. The custodian holds an asset for the IRA. Because of the unusual nature of these assets (a deed, a promissory note or membership interest in an LLC, etc.) there are just a few custodians who specialize in providing Self-Directed IRA custodial services.

An internet search for self directed IRA custodian will produce a handful of firms that regularly deal with Self-Directed IRA transactions. Fees are mainly competitive, but experience, organization and customer service will vary. Custodians will not give legal advice regarding the specifics of any transaction.

The custodian is essential for practical application of the Self- Directed IRA strategy. First, the client determines that a Self- Directed IRA is appropriate for his or her portfolio. Next, the client, or a designated representative such as an attorney, CPA or financial planner, sets up the Self-Directed IRA custodial account. Funds are then deposited, transferred or rolled into the new account. Once the account is funded, those funds are directed to the selected investment(s). The custodian disburses the funds in exchange for indicia of asset ownership.

Counsel should understand that at no point in either setting up an account or funding an investment should the client receive a distribution of any part of his or her IRA account. Setting up a Self-Directed IRA simply involves the movement of funds from one IRA account to another, presuming the client is not creating the Self- Directed IRA account with a new deposit.

Another issue is back-door taxes that normally apply to trusts and non-profit organizations. Remember, within an IRA, all gains compound on an ordinary income tax-deferred or tax-free basis. Two taxes come into play, however, that can impose a present, non- deductible tax on the income of IRA plans.

Unrelated debt-financed income tax (UDFI) [26 IRC section 514(a)] applies to gains on investments that involve debt-financed property. This tax is generally computed using the debt/basis ratio of the investment, applied to the investment gain. UDFI will generally apply the same to direct ownership of property as to ownership of membership or partnership interests.

Unrelated business income tax (UBIT) [26 IRC sections 512(a) and 513(a)] applies to any income derived from activity not substantially related to the taxed entity's purpose. This typically involves the sale of a product or provision of a service; rent from real property is generally exempt from this tax .

UDFI and UBIT tax rates will usually be applicable trust tax rates, which are generally higher than individual and corporate rates.

Counsel should generally be aware that annual tax issues exist, in addition to ordinary income tax issues with account contributions and distributions. A CPA who understands this taxation is an important part of the Self-Directed IRA team, and should be consulted at the beginning of the investment cycle.

Personal Guarantees

Related to the use of debt is another issue that is common to real estate investments, personal guarantees. Under 26 IRC section 4975(c)(1)(B), any debt used in a Self-Directed IRA transaction must be non-recourse to the investor. Some institutions will offer this type of financing, and a few are beginning to specialize in Self- Directed IRA loan transactions. An internet search for non recourse self directed IRA lending will produce institutions that regularly work with Self-Directed IRA transactions.

Roth IRAs

While traditional IRAs operate on a tax-deferred basis, Roth IRAs offer tax-free benefits. The investor may not deduct contributions to a Roth IRA in the year of contribution, unlike the varieties of a traditional IRA, but beneficiaries may generally withdraw from a Roth IRA upon receipt (within IRS rules) with no tax liability. Roth IRAs are very attractive to many investors, and are also eligible for use in the Self-Directed IRA strategy. However, counsel should be aware of special IRS treatment of Self-Directed Roth IRAs.

Pursuant to Internal Revenue Bulletin 2004-4, any entity that is substantially owned by a Roth IRA falls into a unique category. Under 2004-4, a transaction between a Roth IRA entity and a related person (who might not even be a disqualified person) is a listed transaction. If an arrangement fits this mold, the investor is required to report the transaction to the IRS, or face stiff penalties.

Running Afoul

Counsel should finally note the consequences of a client running afoul of applicable IRS laws when using a Self-Directed IRA.

If a Self-Directed IRA is not executed properly, there is a risk that the IRA will be considered distributed to the IRA owner. Presuming the owner is not at an age where he or she may begin taking distributions from the IRA, there will be at least a 10 percent early withdrawal penalty on the amount of the account, plus income tax at the owner's applicable rate.

A violation of section 4975 brings even more severe consequences. The IRS places a 15 percent tax penalty on each prohibited transaction. [26 IRC sec. 4975(a)]. This 15 percent is calculated on the amount involved in each year of the transaction, and the tax is paid by any disqualified person who participated in the transaction (other than a fiduciary acting only as a fiduciary).

The IRS places an additional 100 percent tax penalty on each prohibited transaction that is not corrected within the taxable period. [26 IRC sec. 4975(b)]. This penalty is also calculated on the amount involved in each year of the transaction, and is also paid by any disqualified person who participated in the transaction (other than a fiduciary acting only as a fiduciary).

Counsel should underscore these consequences to promote responsible use of the Self-Directed IRA strategy.

Conclusion

The IRA can be a powerful part of an investor's retirement plan. By using the Self-Directed IRA strategy, sophisticated investors can incorporate private investments into a perfectly legal retirement structure, and can enjoy gains on a tax-deferred or tax-free basis. Counsel should stress the limits of this strategy, in addition to any benefits that might apply to a particular investor's situation.

The client must understand IRAs. No matter what the asset - stocks or apartment complexes - regular IRA rules still apply. Self- Directed IRA only refers to an IRA strategy, not a new world of retirement planning law. Counsel should encourage investing clients to perform independent research on IRAs, and to schedule a meeting with an experienced financial planner to learn the mechanics of IRA contributions, benefits and distributions.

The client must also understand the investment to which the Self- Directed IRA will be directed. It is the client's job to research, verify and analyze things like market conditions, financial projections, valuation, risk, liquidity and legal parameters. This applies doubly if the client's IRA will have business partners. If the numbers look promising, but a client needs help, encourage the client to speak with a professional in the relevant investment's market.

Counsel should finally underscore the goal of a Self-Directed IRA. According to the IRS, an IRA is a personal savings plan designed to provide for retirement. IRS Publication 590 (2004). A Self-Directed IRA is no different. Retirement is the target with this strategy; the client should maintain perspective and should map the plan accordingly.

Whether a Self-Directed IRA is right for an investor depends on a lot of factors. The client must see the whole picture, and should learn about IRAs. The client must research potential investments, and should be encouraged to ask questions along the way. Counsel should help the client keep perspective and identify problems.

If the goals and parameters are kept in focus, a Self-Directed IRA may be a good fit with a client's retirement plan.

This article was originally published in Missouri Lawyers Weekly

Home | Who We Are | Listings | Where We Are | Links | Link Exchange | Contact Us
Our Buying Property in Costa Rica Blog | Affiliate Plan | Our Newsletter