Investors Corner

Invest on This Coast — Income Property, Tax Strategy, and Your IRA

Investors here have more options than most realize — buying income property, structuring a purchase to protect assets, or using retirement funds to buy real estate directly. Our own Michael Greenwald, CPA, specializes in the tax side, so you’re getting the mechanics from someone who does this, not a generic explainer.

Buying Costa Rica real estate with your IRA

A small but growing number of IRA holders put their retirement funds into real estate instead of only stocks and mutual funds. Section 408 of the Internal Revenue Code lets an IRA hold land, commercial property, condominiums, residential property, trust deeds, and real estate contracts — through a traditional IRA, a Roth IRA, or a SEP-IRA.

How it works

You set it up with an independent IRA custodian that allows real estate; most banks and brokerages limit you to CDs, stocks, funds, and annuities. The custodian — not you — holds title and makes the actual purchase, and the title reads in the custodian’s name for your benefit. Custodian fees and services vary widely, so choose one that knows real estate. Your IRA can also buy a share of a property alongside others (a spouse, a partner, a friend), and if the purchase is leveraged, the debt must be a non-recourse note.

The rules that trip people up

• No personal use. While your IRA owns it, you can’t live in it or use it as a vacation home — and your spouse, parents, or children can’t have owned it beforehand.
• Money in, money out. Every expense — taxes, insurance, repairs — is paid from the IRA, and all rent is paid back into it, so keep liquid funds in the account.
• Contributions are allowed up to the current federal limits (more for a SEP-IRA if you’re self-employed).
• Selling is fine as long as the buyer isn’t a family member; the proceeds stay in the IRA for your next move.

In Costa Rica, a common play is to sell an IRA-held property with seller financing, so the buyer’s payments flow straight back into the IRA.

Taking the property out

At 59½ you can withdraw the property penalty-free and use it yourself — as a residence or a second home on the coast — by having the IRA sell it or by taking an in-kind distribution, where the custodian assigns title to you. From a traditional IRA you’ll owe income tax on the property’s value at that point; from a Roth IRA you owe nothing, which is why a Roth is often the strongest fit for property you expect to appreciate.

Which account

• Traditional IRA — contributions are deductible now; withdrawals are taxed later as ordinary income.
• Roth IRA — no deduction now, but qualified withdrawals come out tax-free. Usually the best fit for a long hold that appreciates.
• SEP-IRA — for the self-employed and small companies; higher contribution room, but you must contribute for employees too.

This is general information, not tax advice for your situation. Talk to Michael and your own tax advisor before moving retirement funds — then let us find the property.