Chile Forum

Has any former or current U.S. resident utilized IRA funds to acquire real estate in Chile? If so, care to share any of your experiences with the process (e.g., ease/difficulty; timeframe; special procedures; etc.)? TIA.

I going to assume we are talking U.S. IRA here. It is possible, and we have done it for clients. The catch 22 is that it can add incredible delays and expense to a normal purchase, that might very well wipe out any tax benefits. A lot of it depends on how your IRA is structured.

Here is a typical one, to illustrate the problem a bit. You have an IRA in the States. You hire some company that is in charge of it, and one of their employees acts your financial rep with legal authority over your account.

Well, in order to buy property in Chile we end up with a situation in which we need to create an incredibly long and complex line of Powers of attorneys and legalization of documents inorder to keep the money in the IRA chain of ownership. So, for example your account rep or the company he works for has a POA from you in the USA. We need to authenticate that U.S. POA, then perhaps the articles of incorporation of the company he works for, then possible another POA perhaps for you to authorize him to purchase property on your behalf. Then we got to get a POA from him and legalize that so we can request a RUT number for him. Because the IRA or the company that manages it, as a corporate entity, is actually owning the property. All of those documents have to go through standard legalization process in the States and Chile to be valid.

This is not even fully accurate account of all the issues, but just more of sketch of the mess that can develop. There are bunch of ways your IRA might be structured in the States, and each would create its own paperwork mess. At the end of a day, a little regional registry might simply say no (we normally start with them and work our way backwards because of it).

Even in a stock IRA that is common in the States you will incur likly another $3,000 to $5,000 in legal fees and expenses (perhaps more) above normal cost of transferring a property to do something like that. You could throw in the the whole attempt at creating a company in Chile, that is owned by the IRA on top of it. That would likly run another few thousand dollars to start. So, if the tax savings is really worth it, then it is possible.

It might be easier if you have some sort self managed IRA, but it really might be something better avoided all together if possible. You would really need to talk to your tax guy, because remember at the end of the day it is about getting the tax break from the IRS. What will they want you to prove?

Admin - Great response as always. You were getting dead-on near the end, when you referenced a self-managed (self-directed) IRA, which is the case in point. While this may have some limited benefit within this scenario, I suspect that your description is pretty accurate, particularly in a country like Chile, which loves its paperwork. It will likely be a time consuming and costly process, but one which might be explored. Thanks! If anyone has gone through this and can shed some light on that cost, I'd love to hear from you. PM me, if you prefer.

I had looked into establishing a self directed IRA to make a business investment but decided not to.
There are two methods. First is to hook up with a company that wants you to establish an LLC with them as the manager. You transfer your IRA to them (it's safe, FDIC insured, etc) and they make the purchase, keep the records and properly report to the IRA (USA). It's kind of expensive more than $3000 plus annual fees.
The other method is just to use a company to establish a self directed IRA to make the transfers for you. They want the money to go from their account to a corresponding banks account to the recipient account or payee in Chile. Not too expensive, a couple hundred dollars.
The main problem is the fact the IRS does not allow you to use IRA money to provide you a "Job" where you can take the IRA money as wages. If you use it to purchase rental property for example, and an independent company manages it, that's OK. If you use it to buy a business you will run and expect a salary or percentage of profit for your efforts, you could have a problem. The IRS money used would be taxed as ordinary income, penalized at 10% and it would no longer be IRA money so any profit it earned would also be taxed.
Proceed with caution.

Yea, the self directed IRA would likly be the most clean cut method (check on this though), as long as you can directly put the title of the property in your name. The expensive part starts when you have to start putting it in different companies and other peoples names.

I would guess (just a guess) that the IRS would not have a problem with say buying an investment property in Chile, spending 1 months a year enjoying it (you need to maintain and inspect the place right), and then selling it for a profit where the funds are repatriated back to the IRA account in the States or reinvested.

Chile would not have a problem with it, as you are wiring the funds from an IRA account to pay for the property. They don't really care what you call the account outside the country, as long as it is a legal source.

Admin & Zenth - again, thanks for the details. Yeah, nothing cutesy intended with the transaction. Straight up IRA acquisition of a residential property for rental, with the acquisition cost paid in full, it would thus allow the rental income to cover the majority of the predictable expenses. If we choose a relocation to Chile, it allows us to own some nearby rental income property, which we tend to like anywhere we live, and also sets us up to have an identifiable, locally owned piece of real estate, which we'd like to think (hey, a man can dream) might somewhat facilitate the bank account and residency process.

Hadn't seen this post, probably was soaking my brain after tax season. Zenth is dead on the money. The whole thing (SDIRA & LLC) can be done for a bit over $1,000 (just did one today for a client) on the US side if single IRA with no partners to LLC other than IRA itself. IMPORTANT: While in your IRA, the property MUST NOT be used for ANY use, direct or indirect, that benefits you (or people close to you) as opposed to benefitting the IRA. For example, staying in it or having family stay in could result in very nasty penalties. You can do an awful lot with IRA money, but using it for "your" benefit (even quite indirectly) as opposed to for benefit of IRA is the third rail.

John Hyre, Tax Liar, err, Lawyer

admin wrote:I would guess (just a guess) that the IRS would not have a problem with say buying an investment property in Chile, spending 1 months a year enjoying it (you need to maintain and inspect the place right), and then selling it for a profit where the funds are repatriated back to the IRA account in the States or reinvested.

I've been looking at setting up a self-directed IRA and there is nothing preventing most people from using one to buy real estate anywhere in the world. But there are rules, and a "death-penalty" type sentence if the IRS ever finds any of rules are broken. The rules for self directed IRAs prohibit any direct financial gain, benefit, or use by the owner of the IRA or anyone in their direct blood lines. You cannot use the property yourself or rent it to Mom or Dad, any children, or siblings. You could however rent it to aunt Martha or the next door neighbor because they're not blood relatives. All rents/deposits have to go directly to a bank account set up under a custodian for the specific use of the IRA and no IRA funds can ever be commingled with personal funds. If any of these rules are broken, the IRA is considered void, and the IRS will immediately assess taxes and penalties on the full value. That means any property you might have purchased will be valued and taxed as though it was money sitting in an account, and if you don't have the cash to pay the taxes and 10% penalty, the IRS will seize other assets to collect their due.

For Americans, the easiest way to start a self directed IRA is to incorporate an LLC. The cost and details vary from state to state, so it is probably best to get a lawyer involved early on. This web site also has some good info:

http://www.iraaa.org/learnmore/faq.aspx