Investing in real estate outside of the United States is entirely possible with a self-directed IRA. For some investors, this can be a smart way to diversify their retirement savings and tap into a specific network or the experience they may have in a foreign market.

While there are plenty of opportunities for profit in foreign countries, there are some complexities to this type of investing that you should fully understand before using your IRA funds on a beachfront property in a tropical paradise.

Paradise Not Found

Let’s get this out of the way first: Your IRA owned property needs to be a good investment that will provide long-term benefits.

Why? Because you will never sit on the veranda, sip a cool beverage and enjoy the IRA property personally. IRS rules prohibit any kind of self-dealing between you or other disqualified persons and the IRA.

You can’t visit for a weekend and stay in your IRA-owned property, even if you pay market rent. Any investment property owned by your IRA must be exclusively for the benefit of the IRA. The property needs to be a better mix of risk and reward than any other investment you may make with the IRA.

What About My Future Retirement Home?

The second most popular question we receive about foreign real estate is “Can I purchase a property now with my IRA, and then take it out of my IRA to use personally when I retire?”

Technically speaking, this is possible. However, it makes little financial sense.

You may not purchase a property from your IRA. The only way you can take a property out of your IRA is to distribute the property in-kind from the IRA to yourself. This is a taxable event in a tax-deferred IRA or 401(k).

The appraised value of the property at the time of distribution will determine the taxable amount, and will be added to any other income you have in the year of the distribution. The result will be a very large tax bill at a likely very high tax rate.

Any gain in value the IRA experienced over the time you held the property is not sheltered, but simply increases your tax burden when you choose to distribute the property. You would be better off simply investing the IRA in some other asset that produces good returns.

When the time comes to retire and have a personal residence or second home in some other land, you can distribute some portion of the IRA to acquire a property at that time. If financing is available, you may be able to distribute a fraction of the property cost, and then take smaller distributions over a period of years to pay off the property.

These smaller IRA distributions over time will be at a lower marginal rate than a large lump sum distribution in a single year.

With a Roth IRA, there is no tax cost to distributing the property. As such, purchasing a property many years in advance of your intended use can potentially work out.

This approach is generally only beneficial if the property produces good annual returns during the period from purchase to distribution. In that case, you’re not only acquiring a property for future use, but also maximizing the value of tax-free growth in the Roth IRA.

Purchasing your dream vacation or a second home with your self-directed IRA is not a reality. However, there are many reasons why foreign real estate can be a means to grow your retirement savings.

Geographic Diversification

One of the key benefits of a self-directed IRA or Solo 401(k) is the ability to be truly diversified with your retirement savings. Investing in real estate as well as conventional publicly-traded assets is a popular form of diversification for many investors. Your portfolio can be further diversified in real estate by having property in a foreign country.

There are many rapidly developing markets around the world — some of which many operate at much lower value thresholds than similar markets in the United States. The ability to be in the path of growth is very possible.

Different countries may have different overall economic cycles relative to the U.S. as well. While the U.S. real estate market is currently very strong but potentially headed into a leveling off period, other parts of the world are at the beginning of a growth curve.

Beyond the US Dollar

Another form of diversification associated with foreign real estate is the ability to hold assets not correlated to the U.S. dollar.

Local Expertise

Many of the investors we work with who are interested in foreign real estate have specific knowledge about the market in which they plan to invest. They may be from another country originally, or have family there. Perhaps they served in the military or lived abroad as part of a corporate career.

Success in most all real estate investing comes from understanding a local market, so this kind of local expertise can be very valuable.

Types of Foreign Real Estate

As is the case when investing in real estate domestically, most any kind of foreign real estate can be held in a self-directed retirement plan. We have clients investing in resort condos as short-term rentals, commercial properties, plantations, and a variety of other opportunities.

How to Take Title?

While IRS rules allow for IRA or 401(K) plans to own foreign real estate, taking title to real estate in a foreign country can have its own challenges.

A handful of countries will allow for a U.S. based entity such as an IRA-owned LLC or Solo 401(k) trust to hold title to real property. In most countries, however, direct foreign ownership is not possible.

In these cases, it may be necessary to form an in-country entity such as a corporation or trust to vest title to the property. The U.S. based retirement plan entity will then be the shareholder or beneficiary of the foreign vehicle. The foreign entity is then used to hold title and operate the property in-country.

You will need to work with legal counsel in the foreign country to establish such an entity if necessary. This can add considerably to the time it takes to get IRA capital into a position to execute a transaction, so plan accordingly.

In-Country Taxation

Income produced by a foreign real estate investment will be tax-sheltered to your self-directed IRA or 401(K) plan in the United States. The use of retirement funds does not exempt the transaction from any foreign taxes, however.

You will want to be sure to understand if there is any taxation at the federal or local level in the country where you will be investing. This would be true for both operating income such as from a rental or gains on the sale of property.

The Checkbook Control Advantage

A Checkbook IRA or Solo 401(k) provides significant advantages when it comes to investing in a foreign country. Very few self-directed custodians will even process foreign investments. Those that do generally have longer than normal processing times and significant additional fees for foreign transactions.

With a checkbook self-directed plan, you eliminate the custodial layer for all investment transactions. You have full control over the entire process, and can work directly with your foreign counsel and counterparties to ensure the completion of your transaction.

Investing in foreign real estate introduces additional layers of risk and complexity. In the right situations, there can be very profitable opportunities that will help you to better grow your retirement savings, but success in this type of investing really does require a lot of things to align properly.

Be sure to perform considerable diligence on any opportunity as well as the logistics involved in executing the purchase and operating a foreign property within your self-directed retirement plan. If you find there’s an opportunity for returns that outperform what you may be able to do domestically, then an investment in a foreign land may make sense.

Choosing a proficient property manager for your foreign IRA property is another important consideration. Learn more about vetting a property manager for your IRA property »