Most investors are not aware that the IRS permits the use of retirement funds to purchase both domestic as well as foreign real estate. In fact, the IRS states so right on their website. Using retirement funds, such as a Traditional IRA, Roth IRA, SEP, SIMPLE IRA, 401(k), 403(b), etc to buy real estate through a Self Directed IRA LLC vehicles has proven to be an extremely tax advantageous.
Many U.S. investors have began to recognize the tax advantages of using a Self Directed IRA LLC with “Checkbook Control” to buy real estate in Costa Rica. There are many reasons Costa Rica is so appealing to American investors. The most obvious reason is the weather. There are only two seasons in Costa Rica: the dry and the rainy. Both times of year enjoy a large amount of sunshine. Also, Costa Rica offers a far more laid-back way of life which is why so many retirees and vacationers enjoy Costa Rica so much. In addition, many U.S. investors have began to view Costa Rica real estate as an excellent investment opportunity for both personal assets and retirement assets. A major reason behind the popularity of Costa Rica as an investment destination has to do with it’s natural beauty and lifestyle. Like a lot of U.S. individual investors, a number of U.S. corporations and foreign corporations have began purchasing land in property in Costa Rica for development purposes. This had prompted increased public awareness of the real estate investment opportunities in Costa Rica.
The tax attorneys at the IRA Financial Group have significant experience assisting clients use their retirement funds to make real estate investments in Costa Rica through a Self-Directed IRA LLC or Solo 401K Plan.
In the case of a Self-Directed IRA LLC an LLC is established that will be owned by an IRA and managed by the IRA Holder (you). The IRA funds would be transferred tax-free to a new IRA Passive Custodian who would then transfer the funds to the new IRA LLC bank account. The LLC manager (you) would then simply write a check to the seller of the Costa Rica property to complete the transaction. Title to the property would be held in the name of the LLC.
In the case of a Solo 401k Plan, an IRS approved Solo 401(k) Plan would be adopted by a business and the business owner (you) would become trustee of the Solo 401(k) Plan. The business owner’s retirement funds would then be transferred tax-free to the new Solo 401(k) Plan ban account. The trustee of the Solo 401(k) Plan would then write a check to the seller of the Costa Rica property to complete the transaction. Title to the property would be held in the name of the Solo 401(k) Plan.
From a local tax standpoint, the Self-Directed IRA LLC or Solo 401(k) Plan would be liable for any local property or other tax with respect to the property. In addition, a withholding tax may be imposed on the transfer of income or sale proceeds from the property. Whereas, from a U.S. tax standpoint, in general, the Self-Directed IRA LLC or Solo 401(k) Plan would not be subject to any federal income tax on the income or gains generated by the Costa Rica real estate investment.
In sum, using a Self Directed IRA or Solo 401K Plan to purchase real estate in Costa Rica offers a number of tax advantages, including tax deferral. Moreover, the use of after-tax retirement funds (i.e. Roth IRA or Roth Solo 401k funds) present a number of interesting tax planning opportunities, including the ability to take possession of the property for personal use with no tax or penalty.