We are buying some property overseas. We are considering using cash in IRA accounts so not to tie up other cash. Construction will be completed in about 6 to 8 months (plus slippage). At some point, after my wife retires, the property will become a second home. At that time we want to "buy" it from ourselves and put the cash back into the IRAs. Is this possible?
My wife and I each have an traditional and Roth IRAs with enough total cash to cover the purchase. We plan to rent it out while we aren't occupying it.
I did some research. You can use IRA money to buy property as long as you don't use it yourself. You can then take it as a distribution. I couldn't find if that applies to Roths, a property overseas (in this case, Ecuador), or whether we can transfer the property out of the IRA without taking it as a distribution.
This looks like an accident waiting to happen. First, buying rental property is not a simple matter. Banks are hard pressed to make loans against such property and expenses must be paid for from within the IRA account. i.e. money shouldn't be flowing from outside the IRA into it to provide any cash flow. Next, I'm sure there are those with expertise in this, but the fact that you will need to mix funds, both yours and the wife's and also mix traditional and Roth IRA money all sounds like it's too easy for the IRAs to be considered broken. Last to do this for a property overseas that you intend to then move into implies a level of self dealing that I don't know if it will pass the rules regarding such matters.
I look forward to seeing other input here. I can't imagine the answer being simple. Joe
I'm not good with IRA accounts at all, so waited for someone else to lead off on the replies. The OP's opening lines above wave a huge red flag to me. IRA accounts as I understand them are generally considered a preferred category of capital, as gains declarations are deferred. Buying property overseas can be problematic (Ecuador's politics are not like the U.S. you know - the government there can just reach out and take your stuff, ask any company or farmer in Venezuela - even in Spain, an English couple lost a 350k newly constructed retirement house, their only residence, to demolishment, because the construction license was rigged). Thinking of using IRA cash instead of other cash sounds like either a misconception or a mismanagement issue that should be addressed before getting into esoterics (like figuring taxes that will be due in Ecuador for U.S. citizens resident there, and combined taxes on rental property in the interim). If the thought is to invest in Ecuador through the IRA, thus avoiding whatever early withdrawal fees may be involved in taking out cash, I doubt IRA rules will allow a house in Ecuador as an investment. Closer would be a rental property here in the U.S., but does it make sense to depreciate in a tax deferred account?.
Agreed. Based solely on the limited info presented, this appears to be another instance of buying something someone can't afford. My sense is that,again, based on limited info presented, OP is better served by finding a way out rather than finding a way to proceed.
If you could get around the complexities of buying rental property inside an IRA, it still could be a good investment. Consider using that "other cash" you mentioned to make the purchase. But do plenty of research before buying. By all means do not fall for some ad in a magazine saying "Great opportunities for property in Ecuador" or something like that. I would never buy property (or land) in Ecuador without spending time there and becoming familiar with that country. Same for Costa Rica or anywhere else. When you said "construction will be completed in 6 to 8 months," that to me is a danger signal. And the same care and attention that you would pay to checking out the condition of the property, negotiating with the buyer, getting the lowest mortgage rate possible, etc., if you bought in the USA, also applies to any foreign transaction.
We just returned from a trip to Costa Rica and Ecuador. We found two retirement properties that will provide a comfortable lifestyle. Both are good investements plus the potential to rent one while occupying the other. They two properties together would be less than half our net worth. Affordability is not an issue.
Interest rates in Latin America are high so these will be cash deals. By happenstance, we have a lot of cash doing nothing in our IRAs so we would not have to liquidate any assets. We could take the cash from the traditional IRAs as distributions but not the Roths. We want to keep their tax free status. I was hoping there was some clever way to "borrow" the cash in the Roths (about $200K) until we sell our house when my wife retires in a year and a half. That was a long shot but it never hurts to ask.
Forgive me for 'butting in' here - you replied to Joe Taxpayer. Pursue it a bit further here - I can't reply to the specific IRA questions, but others here may be able to. It very rarely hurts to get communication and ideas on something. Some other considerations are what I'm trying to offer.
Do you have 100% legal advice on paper both there and here? You need hard paper before signing anything. (I am bad with real estate. I get wrapped up in the NEW house emotional thing and the POWER of buying and all the things I can "easily" do to get things just the way I want them. That means I do not do an objective analysis. Be careful - once your cash is handed over it is hard to get it back, you know?) You're handling a lot of life-changing stuff here with a lot of personal skin in the game.
No, but viability IS an issue. Don't get caught in a power trip. Some very wealthy people are real tightwads and do not part with a penny easily. Do not treat "less than half [your] networth" so cavalierly. That's a lot of Susie's lemonade there.
Again, your personal legal department: make sure you have a squeaky- clean title to the house, the floors, the land, and the sky above it.
'Natch I don't know your specifics, but the investments should have been in the tax deferred IRA's IF the idle cash were outside the IRA's, how would you proceed? Trying to correct a situation is sometimes possible, but keep the objectives straight. Avoid creating additional problems - make sure the 'fix' will work.
You do not know for sure that you cannot proceed with your idea. I've seen it floated around by professional writers on real estate pages on the web. Pay the $350 an hour for a good attorney here - you're not suing anyone, you just want some legal advice on what you can and cannot do with your funds.
You can't do this - not only will it violate the self dealing rules it will almost certainly throw off Unrelated Taxable Business Income, meaning you'd have to pay tax on the income even though it was inside an IRA. Very bad, very very bad. Don't do it.
How do you know that? I could be way off here, but when you said the property will be completed in 6-8 months, I was led to believe you might have attended a sales presentation for a development in progress. If that is true, probably the risk you are taking is as great or greater than the difficulties that could come from using IRA money. Make that time frame 12 to 16 months or longer. And if the "good investment" notion came from a sales person, I would believe the earth is flat before I believed it. In my opinion, buying property in a remote location will work to your benefit only if conducted in the same way as buying in your home town. And that means with legal advice, lots of research, independent appraisal by someone of your own choice, home inspection by a qualified engineer if possible, and healthy skepticism about anything an owner or real estate agent tells you.
I agree on the self-dealing thing, but there are folks out there who insist it can be done with an attorney (more fees).
Where it gets messy is that even if we can use pretax IRA money to buy the property, how would we handle ongoing expenses (taxes, insurance, utilities, repairs, maintenance, upgrades, etc.) on the IRA-owned house?
Exactly. Even if the foreign location weren't an issue. Even if taking all 4 accounts (each of spouse's trad and Roth IRA) to make the purchase, one must still have enough liquidity within the larger account to keep all expenses coming from within the IRA. Uncollected rent, repairs, new roof, etc.
I see ads for this type of investing "real estate in your IRA" and it just looks less than above board.
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.