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. How can you do this? The rules governing ownership of real estate in Costa Rica 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.
There is however one caveat: 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. So, the title will really be in their name, not yours. You are allowed to put up your own personal funds for 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. To find a custodian that specializes in real estate, search under terms such as “real estate IRA” or “self directed IRA.” 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.
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.
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 might be your best vehicle.