What is a self directed IRA?
A self-directed IRA (SDIRA) is a type of individual retirement account that allows you to have more control over your investment choices compared to a standard IRA. With a self-directed IRA, you can invest in a wider range of assets, including real estate.
Advantages of Investing in real estate
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Tax Advantages: Income generated from properties purchased with SDIRA funds is tax-deferred until withdrawal, allowing for potentially greater growth over time. If set up as a Roth, the withdrawals are tax-free.
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Diversification: Real estate can act as a hedge against market volatility, providing a tangible asset that may appreciate independently of stock market fluctuations.
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Income Potential: Properties in Costa Rica, especially in tourist-heavy areas, can generate rental income, positively impacting an investor's retirement portfolio.
Comparing Self-Directed IRAs with Traditional and Roth IRAs
When considering retirement investment options, it’s essential to understand the differences between self-directed IRAs (SDIRAs), traditional IRAs, and Roth IRAs.
Traditional IRA:
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Contributions are typically tax-deductible.
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Earnings grow tax-deferred until withdrawal.
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Withdrawals are taxed as ordinary income.
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Mandatory distributions begin at age 73.
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Early withdrawal penalties apply before age 59½
Roth IRA:
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Contributions are made with after-tax dollars and are not tax-deductible.
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Earnings grow tax-free; qualified withdrawals after age 59½ are also tax-free.
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No mandatory withdrawals during the account holder's lifetime.
Self-Directed IRA (SDIRA):
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Offers the same tax advantages as traditional or Roth IRAs but allows for a broader range of investment options.
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Investors can choose alternative assets like real estate, precious metals, and cryptocurrencies.
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Similar contribution limits apply as with traditional and Roth IRAs
Important Guidelines:
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All property expenses must be paid from your IRA funds
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You cannot personally use the property while it's in your IRA
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All rental income and capital gains must return to your IRA
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Maintenance and property management must be handled by third parties
Client Investments
Jason invested $300,000 into a 2 bedroom condo in Guanacaste and earns 5% per year plus asset appreciation.
Client invested $100,000 into fractional real estate ownership in our Manuel Antonio Treehouse Villa, with expected returns of 13% per year plus 5% asset appreciation. This investment has a 5 year exit strategy.
What kind of properties can I invest in with a self-directed IRA?
Land Investments
Investing in land through a Self-Directed IRA (SDIRA) provides a flexible and tangible way to grow your retirement portfolio. Whether purchasing raw land for future development, agricultural use, or speculative appreciation, land investments offer long-term value and minimal management requirements. With an SDIRA, any profits from selling the land flow back into your account tax-deferred or tax-free, depending on your IRA type. This strategy allows you to diversify beyond traditional assets while building wealth through the increasing value of a finite resource.
Vacation Rentals
Vacation rentals are a lucrative investment option for SDIRA holders, offering the potential for consistent income and high returns in popular tourist destinations. By owning short-term rental properties, you can capitalize on seasonal demand while benefiting from tax-advantaged growth. All rental income and profits generated by the property are directed back into the SDIRA, helping to maximize your retirement savings. This investment strategy combines real estate appreciation with steady cash flow, making it a valuable addition to a diversified retirement portfolio.
Fractional Real Estate
Fractional ownership allows SDIRA investors to own a share of high-value properties, such as luxury villas or resort homes, without the full financial burden. This cost-effective approach enables you to diversify into premium real estate markets while enjoying shared income and appreciation potential. Ideal for properties in sought-after locations, fractional ownership provides a passive investment opportunity managed by professionals. With an SDIRA, all income and capital gains from the fractional property return to your account tax-deferred or tax-free, helping you grow your retirement savings through strategic and collaborative real estate investments.
FAQ
Income generated within your self-directed IRA remains tax-deferred, regardless of its source. This includes rental income from Costa Rica properties. However, if you have a mortgage on the property (leveraged real estate), you may be subject to Unrelated Business Income Tax (UBIT).
When you sell property held within your self-directed IRA:
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The proceeds return to your IRA tax-deferred
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No immediate capital gains tax applies
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Taxes are only paid when you take distributions from the IRA in retirement
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Costa Rica imposes a capital gains tax on real estate sales. For properties acquired before July 1, 2019, sellers can opt to pay a 2.25% tax on the sales price or 15% on the capital gain, whichever is more advantageous.
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For properties acquired after this date, a 15% capital gains tax applies to the profit from the sale.
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These taxes must be paid from the IRA funds, as the property is owned by the IRA.
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No. Using IRA-owned property personally constitutes a prohibited transaction and can result in immediate taxation of your entire IRA. This includes:
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Personal vacations
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Letting family members use the property
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Living in the property during retirement
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A third-party property manager must handle all operations. You cannot personally manage the property. All expenses and income must flow through the IRA
The property must be titled in the name of your IRA, typically as: "[Custodian Name] as Custodian FBO [Your Name] IRA"
No. This would be considered a prohibited transaction. Properties must be purchased directly by the IRA.
Your IRA must cover all expenses, including:
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Property taxes
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Insurance
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Maintenance and repairs
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Property management fees
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HOA dues if applicable
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Legal and accounting fees
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Your IRA custodian must approve and pay for inspections
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Use recommended Costa Rica inspectors
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Consider environmental assessments
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Verify property boundaries and permit
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How Does It Work
Step 1
Set Up Your Self-Directed IRA
• Choose a qualified IRA custodian specializing in real estate investments
• Transfer funds from your existing retirement account or make a new contribution
• Your custodian handles all IRS compliance and reporting requirements
Step 2
Select Investment
• Identify real estate opportunities
• Perform due diligence with local experts
• Submit your investment decision to your IRA custodian
Step 3
Purchase & Management
• Your IRA custodian completes the property purchase
• All expenses must be paid through your IRA
• Rental income flows directly back into your IRA
• Property management can be handled locally while you maintain oversight
