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Buying Foreign Real Estate with your IRA

Buying Foreign Real Estate with your IRA

If you want to protect your retirement account from risk, and diversify out of the United States, buying foreign real estate with your IRA is one of the best options available. Returns are generally higher abroad and foreign real estate in an IRA gives you an asset that can’t be seized and whose value is not linked to the US dollar or the US markets.

Most IRA real estate investors are attracted to foreign property because of the lower investments required, higher returns, improved appreciation, lower management costs, and the idea that they will distribute that property to themselves upon retirement and have a home abroad.

The fact that your retirement account is protected from creditors and the IRS is a side benefit for many buying foreign real estate with their IRAs. And don’t forget about the fact that foreign real estate is not correlated to the US dollar or markets, thus a solid diversification play.

  • Note that only real estate in Canada, the UK and France can be seized by the US IRS. Only bank accounts at foreign banks that have a branch in the US are subject to IRS levy.

With that in mind, here’s how to buy foreign real estate with your IRA.

In most cases, the first step in investing your IRA in foreign real estate is to move it from your current custodian to one that allows for international transactions. Your current custodian probably makes money selling you investments and doesn’t want you to invest abroad. So, you need to move your account to a firm that specializes in foreign transactions.

You’ll be making a transfer to the new custodian and not a rollover. The rollover rules changed in 2015, making this method inefficient for most retirement accounts. You can make as many transfers (from custodian to custodian) as you like with no tax consequences.

Next, you need to decide how you want to hold the investment. You can instruct your custodian to make the purchase as a self-directed account or you can set up an offshore IRA LLC and make the investment yourself.

If you plan to make only one investment, it will be less costly to do that as a self-directed account through your custodian. If you’ll make multiple investments, or want maximum asset protection and diversity, then you should set up an offshore IRA LLC.

If you go with the custodian managed option, be sure to select a custodian that will agree to make the purchase for you. A self-directed account means you can “direct” the custodian or request he makes certain investments. If he feels it’s not in the best interests of the IRA, he can refuse.

The reason they might refuse is that they can’t perform the necessary due diligence on the foreign property. They may also have an issue with collecting rents, etc. If any of the many IRA  rules are broken, or the investment goes bad, the US custodian will have some liability.

With an IRA LLC, the custodian makes only one investment. He transfers your retirement account into the LLC’s bank account. From there, you make the investments. You make all the decisions and are the ones bound to follow the IRS rules.

This also means that the custodian has no control over your LLC. He’s not a signer on the bank account and can’t force you to bring back the money to pay a creditor. All of the decisions, rights, responsibilities, and liabilities are on you, the manager of the offshore IRA LLC.

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If you go the LLC route, you need to spend some time getting familiar with the various IRS rules.

The most basic is to treat the IRA as a professional investment advisor would. Don’t borrow against it, don’t receive a benefit from your investments, and always make decisions that are in the best interest of the account.

For those investing their IRAs in foreign real estate, there are three primary rules:

  1. You can’t buy a property with your IRA and live in it, even for one day of the year and even if you pay fair market rent. To do so would be to break the IRS rule against self-dealing.
  2. If you buy with a mortgage, it must be a non-recourse loan. Only the property may be used as collateral. You can’t personally guarantee the loan.
  3. If you buy foreign real estate with a mortgage, you should set up an offshore UBIT blocker or you’ll pay US taxes on the gains and rental income received.

The first two rules are simple enough. The third on UBIT needs some explanation.

When you buy foreign real estate in an IRA with a mortgage, some of the profits generated will be “Unrelated Business Income” and you’ll pay Unrelated Business Income Tax to the US IRS. UBI is taxed at about 35% and applies to both rental profits and capital gains.
In order to avoid this 35% penalty for using leverage in the purchase of the foreign real estate, you can setup a UBIT blocker corporation. For more on this, see: Using Leverage in an IRA Offshore.

I hope you’ve found this article on buying foreign real estate in your IRA to be helpful. For more information on setting up an offshore IRA LLC and suggestions on offshore investments for your retirement account, please contact us HERE. Here are a few articles I’m pretty sure you will love:

Early Estate Planning to Avoid a Huge Headache Later

3 Ways to Use a Self-Directed IRA

Take Your IRA Offshore in 2020

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