Buying Real Estate with your Retirement Distribution

If you have taken or are considering taking a lump sum retirement distribution, you may have done so with the intention of buying a home abroad- your very own international retirement nest. BUYING REAL ESTATE WITH YOUR RETIREMENT DISTRIBUTION

This has become an increasingly popular move over the last few years, as savvy investors and retirees have discovered how to purchase their dream home abroad- while avoiding the typical tax bite.

Using this procedure, countless retirees have saved tens of thousands of dollars while buying homes they thought they could never afford. Could it work for you, too?

Requirements:

  • This method works with lump sum distributions only. A stream of pension payments will not work.
  • The lump sum must come from a Qualified Retirement Plan (corporate or government sponsored) or from an IRA. This includes any of the following:
  1. Profit sharing plan distribution
  2. Lump sum settlement from defined benefit plan
  3. Individual or rollover IRA

Procedure:

1. You must first establish an “entity:” a US corporation or a sole proprietorship.

This corporation can be of any form: Subchapter C, S, or LLC. If two or more individuals (e.g. A husband and wife) wish to pool their assets to purchase a home, they can establish a Partnership or LLP. The entity will be required to file a tax return to establish its existence.

Note: The business purpose of the entity is unimportant to the procedure.

2. Establish a Qualified Retirement Plan and Trust for your entity.

This is usually a Profit Sharing Plan and Trust that covers all the employees of the entity. This will permit each covered employee to self-direct their own assets in the Trust. Each individual within the company (yourself included) will become a Trustee of the Qualified Retirement Plan, and the entity itself will become the Qualified Plan Sponsor.

The Qualified Retirement Plan will be required to file an information return with the IRS every year in order to report the assets in the Trust. (However, if the assets in the Trust are less than $250,000 then no annual reporting is required for a one-person entity.)

3. The lump sum distributions (or portions thereof) you receive will be directly rolled over into the Qualified Retirement Plan and Trust.

If the assets are currently in an IRA, then they can be directly rollde over to the Qualified Retirement Plan and Trust.

If the assets are in a Roth IRA, then the Qualified Retirement Plan and Trust will be drafted to accept assets from a Roth IRA.

4. Once the assets are in the Qualified Retirement Plan and Trust, the Trustees establish a Panamanian Corporation which is owned by the Qualified Retirement Plan and Trust.

The assets in the Qualified Retirement Plan and Trust now include the Panamanian Corporation (which has virtually no value) and the individual assets from the rollovers.

5. The Panamanian Corporation purchases the real estate as a Qualified Plan investment.

This is an “arm’s length transaction” as the individual is not involved as an individual but rather as a Trustee of their own capacity. This way, there is no “self-dealing” in the eyes of the IRS.

6. The IRS will not permit the individual to use the assets in the Trust for their own personal use. Any attempt to do so will be labeled a “Prohibited Transcation” and the individual will be liable for taxes and penalties.

In order to legally use assets for personal use, the individual must request a Prohibited Transcation Exemption (PTE) from the IRS.

Generally, the IRS will grant a PTE if it can be established that the individual will be using the assets in the same manner as an unrelated party would use them. (That is to say: no “Sweetheart Deals,” or abnormally favorable contractual arrangements.)

7. The individual enters into a lease with the Panamanian Corporation to rent the real estate.

Note: In order to apply for the PTE, it is imporatnt that the real estate be leased at market value rent. In order to keep the transcation “above board” (clean, honest, straight-forward) the Qualified Plan Sponsor will appoint an Independent Fiduciary to monitor the leasiing arrangements and assure that no Sweetheart Deal is taking place.

The Indepedent Fiduciary will annually certify that the transcations are “above board.” They will also establish a market value of the real estate for Plan reporting purposes.

8. Once the PTE is submitted for IRS approval, you can rent the property from the Panamanian Corporation and the IRS approval will be deemed retroactive. Move-in time!

If you follow these steps accordingly, the end result should be that your lump sum distribution is available for purchase of real estate, and you can occupy the real estate while paying a tax-deductible rent essentially to yourself. All utility expenses should also be tax deductible as contributions to the Qualified Retirement Plan. *

*This may depend upon certain other requirements which should be discussed with the purchaser’s accountant.

Want more information on using your retirement distribution to buy real estate in Panama? We’re happy to help. We’ve been through the process before, and have walked countless people just like you through it as well. Contact us today.

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