The ability to buy property with an IRA or a 401k was a huge breakthrough for investors seeking opportunities overseas. It has allowed people to “unleash” their retirement plans and give them access to the full potential of the world’s opportunities.
These unusual retirement-plan investments are made with what we call self-directed IRAs and Solo 401ks. These two vehicles work differently, but what you can do with them is exactly the same… as are the restrictions placed on the investments you can make.
For a discussion on the differences between self-directed IRAs and solo 401ks, with their advantages and disadvantages, follow the link to read my previous article on setting up and using these tax-deferred retirement plans.
I’ve purchased overseas property with my 401k, and I’ve met many readers over the years who have done the same thing with great success. But I’ve also met quite a few who missed lucrative opportunities and a handful who gave up on the idea altogether after getting off to a clumsy start.
Here are a few lessons I’ve learned along the way.
Set Up Your IRA Or 401k Well Before You Need It
Years ago, I was traveling in southern Ecuador with my friend Steve (his real name). Steve had been planning for quite a while to buy an overseas property with a self-directed IRA.
And after exploring the area for a few days, we found the perfect property. Hidden away at the far end of a quiet valley, it was a larger, modern home with an attractive wrap-around porch. And at less than US$50,000, it was a steal.
Steve contacted the owner, and they agreed on terms. He returned to the U.S. to set up his self-directed IRA.
Two months later the house was sold… to someone else. Steve was still in the process of setting up his IRA and its companion LLC.
Steve’s story is a common one. Every year, I see at least a dozen people who miss good money-making opportunities because they don’t set up their plan ahead of time, or they underestimate how long it takes.
And I’m sure that tomorrow morning I’ll get emails from a dozen IRA-setup guys telling me how fast they can set one up. And it’s true; not every self-directed IRA will take two months to get going. And while a 401k can be set up in a day, it took me several weeks to complete the rollover and get it funded.
So I guarantee you this: You will never set one of these up fast enough to take advantage of a true, time-sensitive offer if you haven’t started ahead of time.
And what’s more, it’s illegal to use your non-IRA funds to hold the property while your IRA is being set up.
You have to set up your self-directed IRA or 401k before you need it, so you’re ready so strike when an offer presents itself.
Once You Have Your IRA Or 401k In Place, Choose The Opportunity
You’ve probably read a good deal about how to choose an overseas property. But it’s different when you buy it with an IRA or 401k. In fact, it’s easier.
Because you can’t use the property for personal use, you won’t have the normal conflict that comes when trying to balance the attributes of a good second home with a good rental property. When buying with your retirement plan, remember that its only purpose is to generate income or realize a capital gain.
For a few tips on choosing a property, see this essay on how to get the most from your overseas rental.
How You Title The Property Can Cause Delays Or Stop You Altogether
You can’t use retirement funds to buy a property and then title the property in your own personal name; it must be in the name of your IRA, its LLC, or your 401k trust. This can be a problem when the country you’re buying property in needs to recognize the type of entity they’re putting on the title.
If you have an LLC, titling is often not a problem; many countries recognize the LLC and will put them on a property title. And you can create LLCs cheaply and easily in the United States, even doing so online.
But if you’re using a 401k (without an LLC), then I’ve found titling to be an issue. Colombia and Uruguay, for example, don’t know what a “401k trust” is; they don’t know how to hold it accountable to the law or how to tax it.
I tried to get my 401k trust recognized by Uruguay in order to take advantage of a terrific deal on a historic property in Colonia. The property was sold within two days… long before I was even close to setting up an entity that Uruguay would let me put on a title. I should have squared this away well before looking for a purchase.
And whatever entity you use (if it’s not created where the property is), the country you’re buying in will want evidence that you are empowered to sign for that entity. So if you’re buying with an IRA and an American LLC, be prepared to bring documents showing that you are able to represent that LLC.
Finally, consider the tax consequences before setting up an entity with which to hold property. In Uruguay I was surprised to find that foreign corporations were taxed at a lower rate than local corporations in order to attract foreign investment.
Don’t Go Overboard Setting Up Financial Structures And Companies
Men like to play with their money. And one of the ways we do that is to create a mini-empire with different entities in different countries, among which we can move money. We not only get to play with our money, but we feel worldly and financially sophisticated while we’re doing it.
I’ve done this… and I’ve enjoyed it. I like setting up companies. But financially, I learned that there’s no award given for complexity… and, in fact, there’s a penalty in efficiency and cost.
So, in short, create only what you need in order to accomplish what needs to be done. Don’t set up a Belizean trust and a Panamanian corporation with a Swiss bank, when a US$69 LLC from Nevada will do the job.
Here’s The Trick That Will Allow You To Live In Your IRA Property
This is a great headline, right?
But you can’t do it. You cannot live in, use, or benefit from a property owned by a tax-deferred retirement plan. Only your IRA or 401k can benefit… not you.
You guys, our esteemed readers, have come up with some brilliant and creative workarounds… most of which are completely illegal. My favorite was the guy (one of several) who wrote in claiming that he could take an IRA distribution valued at 1/12 the value of the property, and then live in the property one month per year. Clever… but I don’t agree that he won’t get into trouble if he gets caught.
The penalties for stretching the law on prohibited transactions are severe. You could have your IRA or 401k disqualified making all of the tax immediately due… and possibly retroactively due, back to the time you bought the property. And that’s aside from any penalties that may be imposed.
But there are a few tricks you can legally employ.
My favorite is the guy who wanted a country home on a large tract of land. So he bought a small plot and built a home on it. And he also bought all of the surrounding plots with his IRA, creating a buffer between himself and the other property owners. His plan (at some time in the future) was to take an IRA distribution equal to the value of one plot, each year. This way he’d eventually own that large parcel, while not suffering the big tax hit all at once.
In the meantime, he could possibly lease the land out to someone else and let it earn some money for his IRA. I believe this plan is legal provided you don’t actually use the IRA-owned properties.
It’s Profitable And Easy To Manage, Once You Learn The Rules
My first 401k purchase was in Colombia… where I also had another property bought with personal post-tax funds.
I set up separate accounts with the property manager, separate bank accounts to receive rental income, and separate brokerage accounts to transfer money in and out of Colombia, to and from my separate accounts in the U.S.
Make no mistake, this segregation and associated recordkeeping is a lot of work. But it kept my funds—and my records—clean, traceable, and above-board.
And it’s worth it. That rental property in Medellín had a higher return than any other investment I had.
Editor, Overseas Property Alert
I just purchased a share in a corporation in Colombia from First American Realty Medellín.
Can I apply for the resident investor visa from a Colombian consulate in, say, Los Angeles? I’d then get it affixed to my passport, enter Colombia with it, and pick up my cédula de extranjería. [Editor’s note: A cédula in Latin America is your national ID card, carried by all citizens and residents.]
How long does it take to get the cédula?
Whether or not Ryan gets a resident investor visa will depend on the size of the investment. An investment of about US$21,000 will get you a one-year temporary visa, while US$135,500 will qualify you for a resident investor (five year) visa. Both numbers are at today’s exchange rate.
And yes, you can get them at a consulate prior to entry. My first visa was from a consulate, and it took three business days to receive it. You can also apply from within Colombia, which may be easier if you’re not near a consulate. If you go to Bogotá, you get the visa while you wait (if you speak Spanish or have an interpreter).
As for the time to get a cédula, I only have experience at the Medellín office… but they made my most recent cédula while I waited. I was out of the office within two hours.
Good afternoon, Lee,
I enjoy reading these postings and am interested in investing/buying property in Colombia, as my wife is from there. Although we do not live in Colombia at the moment, we will probably retire there.
I want to know something… are you associated with First American Realty Medellín, or Live and Invest Overseas? I am wondering if you are independent.
This is actually a good question, and I don’t blame people for asking when I mention an area or a service provider frequently.
I don’t have any business relationship with First American and don’t benefit in any way if someone buys a property from them. When I first met Rich Holman at the First American office, they were two guys working together, and Rich walked me around El Poblado to show me properties personally. Today, Rich has 55 employees to keep up with the explosive demand in Medellín.
And yes, Overseas Property Alert is indeed a publication of Live and Invest Overseas… one of many
I have to say your article on the pros and cons of living in a tourist area was a great read. Well-crafted, specific, and articulate. You must have been a Liberal Arts major in college.
As to my question: How does Puerto Vallarta compare with Mazatlán? My recollection is that PV is actually less commercial and ‘Bahía de Banderas’ more protected and scenic.
I sense you have very good reasons for choosing Mazatlán.
Gracias de antemano,
I’ve seen lots of dialog comparing Puerto Vallarta to Mazatlán, most of it from residents of one city or the other, making a case for their favorite.
The more I try to compare the two, the more I realize that they really don’t compare.
I like Mazatlán because of its relatively large historic district. And, in fact, the place I bought is on the waterfront in the historic center. Mazatlán’s 20 miles of beaches are also contiguous, so you can walk the entire distance, and all of it is within a short distance (by dune buggy, bus, or taxi) of the historic center. Much of Mazatlán also feels like more of a “Mexican” city to me than PV.
But Puerto Vallarta really excels in its geographic diversity. Its beaches are interspersed along the coast, allowing different areas to have their own character. In PV, you’ll find properties on lush, green hillsides, with wildlife and long views looking out to the ocean… something you won’t find in Mazatlán.
Have a question? You can write to Lee here.