What You Need To Know About Foreign Real Estate Investments and Your Self-Directed IRA
Despite the introduction and rollout of vaccines from Pfizer, Moderna, and Johnson & Johnson, the coronavirus pandemic continues to upend our definition of normalcy. It’s unclear when we might expect a return to life as we knew it before 2020, but for now we are seeing ongoing effects of the pandemic in almost all sectors of business and economics.
While domestic coastal and vacation homes are seeing an increase in bookings from people trying to escape boredom at home, the same cannot be said internationally. Foreign resort areas dependent on American travelers have witnessed drops in seasonal bookings because of flying anxiety, closed or curtailed border admissions, and fear of inadequate medical facilities.
As a result of lower international demands, real estate in some international resort areas may now be more affordable than it was prior to the pandemic. Could this be an opportunity for investors to use retirement funds to purchase foreign property?
At Chicago Trust Administration Services, it is not our role to advise on the financial soundness of foreign property holdings. However, many investors we work with are showing interest in these opportunities.
In the following article, we will review IRS and Department of Labor guidelines for investing in foreign property based on questions our clients need answered. If you’re interested in purchasing foreign vacation real estate through your IRA or other retirement plan, the following six questions are worth considering and understanding.
1. Can I use my self-directed IRA, 401(k), or Defined Benefit Plan to invest in foreign property?
Yes, only countries banned by the State Department are excluded from foreign investment opportunities. You can find a comprehensive list of sanctioned countries here. Foreign investments can be attractive for self-directed investors because they offer a unique option for diversifying outside of the US and beyond the US dollar. For investors who have personal or business ties to another country, this can be yet another way to invest in what you know.
Before you visit foreign countries to look for properties, you should ensure that your IRA is structured to allow for these types of investments. If you find the perfect property but haven’t yet converted a traditional IRA or other retirement plan to be self-directed, it’s quite possible that your sale will fall through because of the amount of time it can take to make this transition.
2. Can I own resort properties jointly in my name as well as my retirement account?
Yes, partnering with yourself and other investors is permitted as long as the IRA is included on the title. With that said, if you opt to use your IRA for foreign real estate investments, the IRA is held under the name of Chicago Trust Administration Services, LLC (CTAS). Because CTAS is a corporation, you need to determine in advance whether local law codes allow foreign corporation ownership and/or joint ownership.
Another factor to consider is that many countries don’t recognize IRAs as legal entities, which can put you at risk for liability. Because your investment would be held under CTAS as an LLC, this structure may help protect you from liability in some countries. In other countries, you may also need to establish a local LLC to protect yourself if a tenant should sue you in a local court.
3. Can I or someone from my family personally use the property?
No, real estate investments made through a self-directed IRA are strictly for rental purposes only. It is illegal to use any self-directed IRA investments for personal gain. So with foreign real estate investments, remember there is no personal usage allowed…not for a week, a day, or even an hour.
If you’re looking to purchase a vacation home, your self-directed IRA is not the answer.
4. Can I choose property managers, maintenance personnel, and third-party booking agents?
Yes, you can! What’s more, expenses for hiring out these services can be paid from your retirement account.
5. Where are clients making foreign real estate purchases since the Covid-19 pandemic started?
We have seen increased interest in coastal Mexico, Costa Rica, Portugal, and Spain. But as we stated above, we are not advisors on where you should look for the best investments for your self-directed IRA. Our role is to help you complete your deals legally and in a timely manner once you know where you want to invest.
With that being said, we encourage you to think about the long-term viability of your investments. Properties in countries that rely on tourism are selling at record-low rates due to the pandemic. And although we expect international travel to someday return to normal, there is no telling when that day will come.
Before investing in foreign real estate, make sure you and your IRA will be able to weather future storms as local governments continue to mitigate against the effects of the Covid-19 pandemic.
6. What else should you be aware of when investing in foreign real estate?
Purchasing real estate is notoriously fraught with setbacks and delays. When making foreign real estate investments, allow for 90 days or longer to close on your property of interest. There is much more paperwork, disclosures, and Know Your Customer (KYC) documentation to complete.
In addition, remember that foreign governments are going through the same Covid-related closures and limited staffing as we are in the US. Unfortunately, government and corporate entities everywhere are still scrambling to complete business transactions as normally as possible.
Partner With An Administrator Who Can Help
Foreign real estate investments may be a great way to diversify your holdings and allow you even more freedom to invest in what you know. But we also know that foreign investing comes with an added layer of complexity in terms of IRS and State Department regulations.
GET IN TOUCH
We can help you navigate these deals legally and in a timeframe that makes sense without the added hassle of dealing with IRA administrators who aren’t experienced overseeing these types of investments. If you’re interested in learning more about how we can help, call us at 312-869-9394 or email steve@ctasira.com to schedule a free 20-minute consultation call.