By J.P. Dahdah, Founder & CEO of Vantage
The world is flat. Well, not technically, but some investors have begun to diversify internationally seeking attractive returns in emerging markets. Our office is experiencing an increase in real estate investments involving Latin American countries such as Mexico, Costa Rica, Guatemala, Panama, Dominican Republic and Brazil. Underdeveloped countries can offer tremendous wealth building opportunities for real estate investors. However, as with any investment, you must educate yourself about the potential hazards so you do not expose yourself to unnecessary investment risk.
If you are planning to purchase property in a foreign market using your self-directed retirement plan, certain precautions have to be observed. I have outlined a few areas for you to consider.
Country Specific Risks
Seek professional advice regarding the local laws governing the purchase and disposition of real estate in the country in which you hope to invest. In some countries, non-citizens are prohibited from purchasing certain types of property. Deed restrictions are common as well. Be clear on how title is taken and make certain your security interest is properly protected.
Real Estate Purchase Contracts
Carefully read all contracts involved in purchasing the property. The contract needs to list the name of your Self-Directed IRA or retirement plan as the buyer. You do not want the contract written listing you personally as the buyer because this is considered a prohibited transaction and can have serious tax ramifications. We strongly recommend that you hire a local professional to ensure that the asset you believe you are buying is what you actually get. It is also important to be certain that the tax burdens of the previous owner are not shifted to you as part of the sales agreement.
The Deed
Make sure your Self-Directed IRA or retirement plan will be obtaining a deed. If you are lending money to a foreign entity with your IRA, and no deed is obtained, be aware it will be considered an unsecured loan.
Income Expenses and Taxes
Your Self-Directed IRA tax benefits do not operate outside the United States. Income may be considered taxable and your IRA is responsible for paying those taxes. If you choose to pay such taxes personally from monies outside of your Self-Directed IRA, such payment will constitute an automatic excess contribution and perhaps a prohibited transaction, subject to applicable penalties.
Sale
Income from sales may be taxed advantaged in certain jurisdictions if the proceeds are re-invested in another property under specific conditions. However, in other instances the tax on income may be very high. It is important to understand local tax laws and rules regarding income from the sale of real property. Consulting local professionals will provide you with invaluable time and money savings.
Remember, your retirement plans are not limited to investment opportunities within the United States. Going global with your Self-Directed IRA can make a profitable impact to your real estate portfolio, however, use local professionals to assist you with your deal and most importantly, educate yourself about the local tax and property laws before executing any transaction.