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Precious Metals IRA

 

Owing Property in Your IRA

Yes, you can use your IRA dollars to own international real estate.

By Larry C. Grossman

Larry C. Grossman, CFP™ CIMA™, is the managing director of Sovereign International

Pension Services, Inc. He has over 25 years experience in the investment business and

was one of, if not the first financial advisors in the country to develop a compliant

method for assisting clients interested in moving their qualified IRA and pension plans

offshore for asset protection and greater investment diversification. Larry’s methods for

accomplishing this transition have been reviewed and approved by some of the top

ERISA attorneys in the country.

Contrary to what you probably have been told by your broker or banker, you can own

real estate in your IRA, including non-U.S. real estate. Over the years, advisors have

wrongly convinced many people they cannot own real estate, as well as a number of other

alternative investments, inside their IRA’s or other retirement plans. Nothing could be

further from the truth. In actuality, the IRS allows a great deal of flexibility when it

comes to investing the assets of your retirement account.

The trouble comes if you don’t have a “self directed” IRA or if you work with a

custodian who imposes his own investment restrictions. Most of these restrictions have

nothing to do with the code governing retirement accounts but are instead employed to

make life easier for the custodian.

What’s allowed—the real skinny

The truth is, the rules governing the ownership of real estate are simple…and you can

own virtually any kind of real estate you could name in your IRA or other retirement

account, including:

• Raw land

• Condos

• Office buildings

• Single-family homes

• Multi-family homes

• Apartment buildings

• Improved land

Prohibited transactions and self-dealing

The IRS has some simple and straightforward rules that define what you cannot do. A

simple rule of thumb is your retirement plan is meant to benefit you at retirement and not

before. You may not, therefore, directly or indirectly, deal with yourself or a disqualified

person.

What does this mean? In short, that you cannot lend money, extend credit, or furnish

goods, services, or facilities to yourself or a disqualified individual. In other words, you

can invest in any type of real estate you want as long as it is an investment and not for

your own use currently.

“Currently” is an important part of this puzzle. Let’s assume you have found your dream

retirement home or the piece of property you would like to build it on. And, remember, as

I’ve explained, the property can be in the United States or it can be anywhere else in the

world that you’d like it to be. Someday, when you retire, you would like to own the

property personally or have it for your own use. No problem. You can take possession of

the property at that time, in effect taking it as a distribution of your plan.

You would be taxed on the value of the property at that time. Of course you could sell the

property outright at anytime as well.

Other requirements:

• You may not purchase the property from yourself.

• You may not purchase the property from family members, with the exception of

siblings.

• Neither you, your business, nor members of your family may lease or live in any

investment property owned by your plan.

• Only retirement funds may be used as the down payment or good-faith deposit.

• The title must be in the name of the retirement account.

• Fractional ownerships are allowed.

Who is “disqualified”?

The relevant IRS code disallows you to deal with yourself or a “disqualified person.”

Who is “disqualified”?

1) An owner, direct or indirect, of 50% or greater of:

• The capital interest of a partnership.

• The total value of all shares of stock of a corporation including all classes.

• The combined voting power of all classes eligible to vote.

2) A member of the family, again with the exception of siblings.

These are the basic definitions of a disqualified individual, but there are other details

related to this that you should understand depending on your personal circumstances.

How to own

As you know, there are many ways to purchase real estate. You can own the real estate

fully or you can own a fraction of it, with other entities or investors owning other

fractions. You can purchase an option on the real estate or you can buy outright using a

land trust, L.L.C., or similar entity.

All of these options are allowed for the kind of investment I’m describing. Furthermore,

you can pay for the property in full using retirement assets or you can finance it. If the

property is financed, you must take special care to structure the purchase correctly so as

to avoid adverse tax consequences down the road.

The down payment must be paid for by the plan, and all future payments must come from

the plan assets, new contributions, and/or income produced by the property.

If the property is fractionally owned by the plan, the down payment and an equivalent

amount of the on-going payments must come from the plan. There are detailed

instructions as to how to accomplish this from a custodian who allows these types of

investments.

Taking on debt

If you wish to use your retirement plan to invest in real estate but do not have sufficient

funds in your IRA, your IRA can incur debt. This debt/mortgage must be in the form of a

non-recourse loan where the only recourse for default of the loan is the underlying real

estate/property.

You can obtain your non-recourse loan from a lending institution, a private investor, or

the seller of the property. (The loan, however, cannot originate from you or any family

member of direct linear descent—for example, your grandfather/grandmother,

father/mother, husband/wife, son/daughter, etc.) You cannot personally sign for the loan.

Managing the property

As a result of a recent tax ruling, some custodians will now allow you to act as your own

property manager. You can collect a “reasonable fee” for this service from your

retirement plan, and you will receive a 1099 at the end of the year for these fees.

Any income from the property must be returned to the retirement plan as a profit of the

plan, less any expenses incurred. The plan assets can be used to pay administrative and

record-keeping expenses as well. Conversely, you can hire an outside property manager

to perform this service, provided they do not fall under the “disqualified person(s)”

definition.

How do I do this?

The good news is you can find the property of your dreams anywhere in the world,

purchase all or part of it with your retirement assets, and eventually take ownership of

it—all completely legally. But, yes, you should seek assistance to make sure you do not

violate any relevant codes or take any missteps that will cause tax problems for you later

on.

Fees for setting up the structure

It will cost you about $250 to establish an account with a qualified custodian, such as

ours. Thereafter, you’ll be charged an annual fee depending on the custodian and value of

the account.

For additional information, please contact me at:

Sovereign International Pension Services.

(Larry C. Grossman CFP™, CIMA), 1314 Alternate 19,

Palm Harbor, FL 34683; tel. (727)286-6237; fax

(727)286-6239; e-mail: This email address is being protected from spambots. You need JavaScript enabled to view it. ; website:

www.offshoreira.com .

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