All types of IRAs, including traditional, Roth, SEP, and SIMPLE IRAs, as well as Coverdell Education Savings Accounts (CESAs) and Health Savings Accounts (HSAs), can be self-directed. Quest IRA gives you the freedom to purchase almost any type of investment. Common investment choices include all types of real estate, newly created and existing promissory notes, LLCs, limited partnerships, private stock, trusts, oil and gas, tax liens, and much more.
In most cases, the first step in investing your IRA in Mexico real estate is to move it from your current custodian to one that allows for international transactions. Your current custodian probably makes money selling you investments and doesn’t want you to invest abroad. So, you need to move your account to a firm that specializes in foreign transactions.
You’ll be making a transfer to the new custodian and not a rollover. The rollover rules changed in 2015, making this method inefficient for most retirement accounts. You can make as many transfers (from custodian to custodian) as you like with no tax consequences.
Next, you need to decide how you want to hold the investment. You can instruct your custodian to make the purchase as a self-directed account or you can set up an offshore IRA LLC and make the investment yourself.
IRAs Accessible to All
Since the IRA was established in 1974, investing in alternative assets has been permitted by the IRS. Despite this fact, few Americans realize that they can use their self-directed IRAs to invest in assets other than stocks, bonds, and CDs. This misapprehension can be attributed to the fact that few brokers and advisors know how to invest in alternative assets. They also do not want to lose their clients by having them auto-invest their pension funds. By taking control of their pension funds through self-directed IRA accounts, Americans can increase returns on their investments by making the right choices and reduce fees and administrative costs payable to brokers and advisors.
American Citizens can increase returns on their pension savings, thereby securing their retirement, by purchasing Mexican real estate with a self-directed IRA (Individual Retirement Account). They will also be preparing for a better quality of life during their retirement. It is a well-known fact that Mexico is among the top five countries to retire in. This guide will assist Americans and their realtors in investing in Mexican real estate using their IRAs.
Five Steps To Acquire Mexican Real Estate for Americans
STEP 1- IRA LLC
Before investing in Mexican real estate or identifying your investment using your IRA, it is recommended that you prepare for the process in the U.S. first. If you haven’t already done so, you should roll over or transfer any existing 401(k) or other private pension fund vehicle into a self-directed IRA LLC. For the reasons mentioned below, an American LLC will be required for this investment.
Not all private pension fund managers or custodians are familiar with investing in foreign real estate using an IRA. Before you proceed further, confirm with your custodian that they are familiar with the process and are willing to accompany you through it. If not, change custodians.
In chronological order, you should:
- Create an American LLC with the wording in its Operating Agreement required for this type of investment. You will need to consult an attorney for this as few pension fund managers and custodians will participate in the creation of your LLC;
- Appoint your pension fund manager as custodian for this investment. They will surely provide you with numerous forms to complete this process;
- Open a bank account for your LLC;
- Transfer your existing pension fund money to your new bank account.
Other than the creation of your LLC, it can take between five to seven business days to transfer your existing pension funds to your new self-directed IRA.
STEP 2 – Choose Your Property
This is the fun part, choosing your Mexican property. If you are using the services of a local realtor, inform them of the fact that you will be acquiring your property using your IRA and that the process will be slightly different from what they are familiar with. They should know that: (1) you will be making an offer “on behalf of a Mexican legal entity to be formed and not personally”; (2) the deposit will come from your IRA LLC in the U.S. The balance of the funds for the acquisition at the closing can come from the Mexican corporation or an escrow account. (3) Inform your realtor of the IRS limitations prohibiting you or members of your family from using the property. Ask them to identify opportunities that guarantee a return on your investment, or a property manager that can offer you similar assurances. This way your realtor will know what properties to focus on and will not waste your time.
STEP 3 – Mexican LLC
The Mexican Constitution prohibits foreigners from purchasing property within 50 km (31 miles) from the shore, or 100 km (62 miles) from any border. Since 1973, foreigners have been able to purchase property within this restricted zone by purchasing through a bank trust (Fideicomiso) or a Mexican LLC. If you are using your self-directed IRA to purchase property within this restricted zone, you cannot use a bank trust to do this as your custodian would have to be the beneficiary of the trust and not you personally. Custodians, which are usually large corporations with numerous shareholders and complex statutory compliance requirements, will not accept to act as your beneficiary of the trust as the process is complicated, prolonged and time-consuming. For the same reasons, they will also not act as the shareholder or representative of your Mexican LLC. Therefore, the only practical way to purchase Mexican real estate using a self-directed IRA is to do so through an American LLC, as a shareholder of a Mexican LLC.
The process of creating a Mexican LLC is relatively simple. However, you should verify that your Mexican lawyer has previous experience in creating one that will be used for the specific purpose of investing your IRA funds. In general, the process is:(1) the incorporation certificate of your American LLC must be notarized by a Notary Public in the U.S. and “Apostilled” by the U.S. Secretary of State in your area; (2) the Board of Directors must appoint you as the legal representative of the American LLC to create the Mexican LLC, and act as its director and (3) you must provide information on the head office and the names and address of the directors of your American LLC. These documents must be translated into Spanish in Mexico before your Mexican lawyer can proceed to create your Mexican LLC. Finally, remember that the operating agreement for the Mexican LLC must also provide the specific language required by the IRS specifying that disqualified individuals cannot use or occupy the property.
STEP 4 – Closing
By now, you have created and registered an American LLC as your self-directed IRA, appointed a custodian, opened a bank account for your American LLC, selected your property in Mexico with an accepted offer and created a Mexican LLC in which your American LLC is a shareholder. You are now ready for the closing or the titling of the property.
The balance of the funds can come from your Mexican LLC. A bank account should be open for your Mexican LLC, and the funds should be transferred from your American LLC bank account. To expedite the process and avoid having to open a local bank account, consideration should be given to using escrow services. The funds can come from the escrow account on the condition that the beneficiary of the account is identified as the Mexican LLC.
At the closing, you will be signing as the official representative of the Mexican LLC and take possession of the property on its behalf.
STEP 5 – Manage the Investment
Once your IRA owns your Mexican property, all expenses and profits related to the investment must come from and return to the IRA account. Your custodian and occasionally the IRS will need to see proper accounting and the traceability of transactions. At this point, you can have two bank accounts open. One in the U.S. for your American LLC and one in Mexico for your Mexican LLC. Regardless of which account you use to operate, it is advisable to keep all transactions in the same account. In other words, income and expenses should be reflected in only one of the two accounts. Occasionally, profits (in the form of dividends) may be directed from the Mexican account to the U.S. account.
By, Alfonso Galindo
The Mazatlan Post
The information contained in the newsletter is not intended to be a legal opinion or to be relied upon by the reader. Readers are cautioned to obtain independent advice from their professional advisors.