Nick Hodges is an international tax expert—and someone we recommend you listen to. He’s helped Americans overseas mitigate their taxes for over 20 years.
We recently asked Nick a series of questions that IL readers have wondered about, including “Can I own real estate overseas in my IRA?” and “What else can I own in my IRA? Costa Rican farms? Boat slips?” and “Can I hold a mortgage in my IRA?”
The answers may surprise you…
Q. What is an IRA and how did they come about?
A. IRAs started out with banks, brokerage companies, and insurance companies. Typically you would give your IRA money to these institutions and they would manage it for you. As time passed, some of these IRA providers began to allow their clients to direct their own investments, but that still meant dealing in stocks, bonds, and the other traditional items you would normally have with a broker taking care of it for you. Generally, this was cheaper and you got be in charge of your IRA money.
Shortly after the introduction of IRAs, another group of trustees came along and decided to allow clients to buy real estate and other non-traded assets with their IRAs. These became alternative self-directed IRAs.
Q. Can you purchase real estate with your IRA?
A. Yes, you can. It has been legal to do this since IRAs were invented over 30 years ago. And it’s easy to do.
Q. Who offers these types of alternative self-directed IRAs?
A. Currently there are about 20 major custodians that offer IRAs that can hold alternative, non-traded investments. The reason there are so few custodians is that each IRA is different and there’s a higher degree of complexity with these IRAs.
When choosing one of these custodians, you should choose a very big company that follows the rules.
Q. What can and can’t you invest an IRA in?
A. For a comprehensive answer to this question, you’ll need to look at IRS Publication 590. This is an exclusionary publication…in other words it tells you the things that you cannot invest in. So if it’s not specifically listed in that publication, then you can invest in it. Here are just some things you can’t invest in:
- Life insurance
- Collectables (for example, antiques, cars, stamps, furniture etc. )
- Capital stock in a S corporation
Q. What other restrictions are there?
A. One of the major mistakes people make when dealing with these IRAs is that they do the transactions, called self-dealing by the IRS. You cannot handle transactions yourself. So you can’t sell to and from your IRA, you can’t borrow from your IRA, you can’t have descendants do any of that. So you can’t own certain assets and there are certain people you can’t do business with.
Q. Can foreign real estate be purchased with an IRA?
A. Yes, you can buy foreign real estate with your IRA, but it’s not as simple as buying real estate in the U.S. Most foreign countries do not recognize your IRA account as a separate legal entity and therefore your IRA can’t buy the real estate.
There is a solution to this.
Q. Can you hold a mortgage with an IRA?
A. Yes, you can but that mortgage needs to be non-recourse.
Q. What else can I do with my IRA funds?
A. You can buy a business, start a business, and you can invest in an existing business.
Here are just some of the things that people have invested their IRAs in:
- A cypress farm in Costa Rica
- A strip mall in Seattle using an LLC
- Boat slips
- Private stock in Green Energy Corp.
- Personal Storage Unit
- A bull breeding company in Texas.
Editor’s note: For the full interview…and a “little black book” for the offshore world…plus video sessions with some of the top offshore experts right now…and more…go here.