IRA Limitations when you buy Costa Rica real estate

by Ivo Henfling

Many North Americans don’t know you can buy real estate in Costa Rica with your self directed IRA (Individual Retirement Account) or your 401(k) (Retirement Savings Account). 

Very few Costa Rica real estate agents know how you can realize the purchase without running into trouble.

You will need the cooperation of your IRA custodian and you need to have a Costa Rica real estate attorney who knows what needs to be done and of course a GoDutch Realty agent for your purchase.

Self-Directed IRA

The IRS rules permit IRA funds to be invested in real estate but they do not require an IRA trustee to offer real estate as an investment option. Many trustees who offer traditional IRA investments, such as depository banks, do not allow IRA owner to invest in real estate because of the extra administrative burden of real estate management. As a result, if you want to invest your IRA funds in Costa Rica real estate, you will probably have to convert your traditional IRA to a self-directed IRA. A self-directed IRA is an IRA that requires you to decide what investments to make yourself.

Limitations of your retirement funds

The requirement places several prohibitions on how real estate can be purchased and used. The IRS rules require IRA-owned real estate to be for investment purposes only and you cannot use it as a residence or a vacation home if you are under 59 ½ years old.

Key to understanding the main prohibition is the term “disqualified persons”. This term is used regarding IRA-owned real estate to refer to the IRA owner and related persons – meaning, the IRA owner and spouse, ancestors (mother, father, and grandparents) and descendants (children, grandchildren and their spouses), including the IRA-owner’s investment advisers, including any IRA funds trustee and any business in which a disqualified person has a 50 percent or greater interest.

IRS rules prohibit the use of IRA funds to purchase real estate from a disqualified person. The rules prohibit a disqualified person from using any real estate purchased with IRA funds, as a home or business. These rules even preclude you from purchasing a vacation home that is only partly for personal use and otherwise rented to others.

Return on Investment on your retirement funds

Over the years, we have sold a lot of Costa Rica real estate through pension funds and retirement savings plans to those who plan to retire to Costa Rica in the future and don’t want to have their savings invested in the stock market or other markets that do not pay the same ROI as an investment in Costa Rica does. If you invest your money in a rental property in Costa Rica, you can count on an 8 – 10% Return On Investment (ROI).

Our own agents have taken the lead

Some of our own real estate agents, like Isabelle Jones and her husband Howard, have used their self-directed IRA for investment purposes in Costa Rica, just like many of our clients have done. It is really very simple: you can use your funds to purchase a building lot and sit on it until the values in the area increase. Or you can use a local builder and build a spec home. Once you sell the land or the property with the house, your initial investment PLUS the profits roll back into your IRA account and your taxes are deferred. They will just stay in your IRA account until you decide to make another real estate investment. Contact Isabelle if you have any questions or want to see the properties Isabelle has for sale that would rent well.

Or purchase a retirement home in Atenas

You can also purchase the retirement home of your dreams in for example a nice location like Atenas and have our rental agents Diane Farquhar or Paul and Gaby Furlong rent it out for you as a vacation rental or as a long term rental and have the income roll back into your self directed IRA account. The best part of the deal is that Atenas has a great market for rental property because it is well located between San Jose and the Central Pacific beaches and the weather is always nice there. This will allow you to go visit all the different beaches Costa Rica has to offer, like Samara Beach, in the photo below. Once you retire to Costa Rica, you can purchase the property from your own IRA and if you are over 59 ½ years old, your taxes are deferred.

There are of course quite a bit of rules and regulations if you want to use your retirement fund for a purchase of Costa Rica real estate but  any questions you might have can be easily answered by your IRA custodian, your real estate attorney and your preferred Costa Rica real estate agent.

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I DO want to remind our readers that we appreciate any referrals you can send us. I know you all meet people on the plane, in the supermarket, at yoga, at the gym, at the Blooms ladies club, at the potluck organized by your community. Please remember the GoDutch Realty agents when you talk about your home in Costa Rica, when you meet someone who wants to purchase one, we appreciate it.