Can I Buy A Retirement Home With My Self-Directed IRA, Solo 401k, or DB Plan?
You can buy your dream retirement home with your self-directed IRA, IRA-LLC, Solo 401(k), or Defined Benefit Plan. Your IRA Checkbook and Checkbook 401k can be used to purchase real property worldwide – Playa del Carmen, Mexico to Beijing, China and anywhere in-between. However, you must be aware of the prohibited transaction tax rules that apply to real estate investment. This post will address key questions about purchasing a vacation home with tax-favored retirement accounts.
1) “My IRA and Qualified Plan custodian says that Retirement Accounts Can Only Be Invested in Stocks and Mutual Funds.”
A: The Tax Code and IRS allow retirement accounts to purchase nearly any investable asset, with only a few exceptions. Real Estate IRAs are definitely allowed – and make a great investment.
2) What Can’t I Do With My Real Estate IRA Retirement Home?
A: While the property is held by your IRA or Qualified Plan you and other disqualified persons may not use the property, per the Prohibited Transaction Rules of Section 4975 of the Tax Code.
3) What Can I Do With My Real Estate IRA Retirement Home?
A: You can treat it as an investment property and get rental payments from tourists, vacationers, residents, and other non-disqualified persons. All income from the property will be tax-free or tax-deferred income to your retirement account. When you’re ready to use the retirement property, it can be distributed from your SDIRA or SD401k.
4) How Can I Get The Property Out Of My Self-Directed IRA, IRA/LLC, or Solo K?
A: Using an in-kind distribution, which means that your retirement account distributes the asset it holds, as opposed to liquidating the investment and distributing the cash. In the case of an IRA-LLS or Solo 401k-LLC, LLC membership can be distributed.
5) Will The In-Kind Distribution Be Taxable?
A: If the IRA retirement home is held in a self-directed Roth IRA distributions will NOT be taxable.
If the retirement home is held in a self-directed Traditional IRA, in-kind distributions will be taxable as ordinary income. You may want to spread the distribution out over several years to spread the tax liability out over that period. Bear in mind that you’ll want to get an appraisal of the fair market value of the property before each taxable distribution. Disqualified persons can’t use the property until fully distributed from the SDIRA or self-directed Qualified Plan.
6) Can I buy a retirement home or investment property with the the restricted zone in Mexico using an SDIRA?
A: Yes, your SDIRA can purchase Mexico investment property to which you can eventually retire. The most efficient way to do so is with a US-domiciled IRA-LLC, in conjunction with either a Mexican Fideicomiso (FEE-day-coh-MEE-soh) which is a bank-held trust (a Mexican Land Trust-MLT), or a Mexican corporation. In most cases, a Fideicomiso – which is easier to set up and maintain than a Mexican corporation – is the entity of choice.
7) Is a Fideicomiso Mexican Land Trust (MLT) treated as a Trust for US tax purposes?
A: No, a Fideicomiso is not a Trust for US Tax Filing purposes. The IRS addressed this subject in Revenue Ruling 2013-14. The ruling is similar to a private letter ruling issued on July 30, 2012 (PLR 201245003), but provides guidance that similarly situated taxpayers can rely upon. Rev. Rul. 2013-14 does not apply if the MLT owns any other property or is permitted or required to engage in any activity beyond holding legal title to the Mexican real property.
Self-Directed Retirement Paradise
It seems reasonable to have the ability to purchase a retirement residence with retirement funds – and it is! As long as you abide by the prohibited transaction rules you can buy a house anywhere in the world. Mexico, Thailand, China, Israel, Dubai, Spain, France…and all other countries are accessible. Tahiti, here I come!