Lately, I’ve been doing a lot of research on the topic of self-directed IRAs for American investors interested in Colombian real estate assets. The prospect of unlocking a lifetime of tax deferred savings and being able to freely invest those funds in alternative assets like foreign/Colombian real estate is a concept that here at Casacol we’ve seen a lot of interest in from our clients.
In fact, it’s the questions that our clients have stumped me with lately that has caused me to conduct this research. Specifically, “how do I take my self-directed IRA/retirement funds and properly bring those funds to Colombia?” That’s precisely the question I will answer in this article.
Note: I’m writing this article fully knowing that it is a work in progress. I am certainly missing things here and will aim to update and improve this article over time as I learn more.
How does the self-directed IRA work when buying Colombian real estate?
First off, this is a concept for American investors only. As far as I can tell no other country (Canada, UK, EU countries) allows their citizens to invest their tax deferred retirement assets (directly) abroad. Land of the free, I guess? This Wikipedia article sums up nicely how self-directed IRAs work and some main things to think about.
Essentially the process is as follows:
Step 1) Choose a trustee/custodian (here’s a list).
The role of the trustee/custodian is to help guide you through the process of opening and managing your self-directed IRA and keep you fully compliant as the IRS regulations are fairly strict.
Step 2) Roll over an existing 401K or transfer funds from existing IRA.
Your retirement funds must be eligible to transfered to a self-directed IRA. Every employer and every individual is going to be different and will require direct intervention from your trustee and your existing IRA/401K plan.
Step 3) Choose the proper investment vehicle/purchase process
This step will depend greatly upon what kind of Colombian asset you are buying.
a) You may be purchasing a titled property – If you are looking to acquire a titled property (apartment unit, etc.) then you will NOT able to write/receive the titles in your own name per the SD-IRA rules. This is what is referred to as “co-mingling” of funds and will create an immediate and large IRS tax implication. Solution: You must create a Colombian SAS that is either owned directly by your SD-IRA account OR owned by a US based SD-IRA Real Estate LLC. In this cases, you’ll need to complete what is called a single member investment authorization.
Note: Our Colombian SAS specialist Valentina Jaramillo works for me and can be contacted directly ([email protected]) for a document that explains the steps/costs of creating and maintaining a SAS in Colombia, just please copy me [email protected].
b) You may be buying into an existing real estate trust/legal entity (SAS, fractional investment, real estate trust, shares, etc.) – If you are buying into a project/development/trust/company this is considered a type of “private equity” investment and as long as it is reviewed/approved by your custodian then you can transfer funds from your SD-IRA account directly to the Colombian bank account assigned to the project/trust. You will not need the Colombian SAS as an intermediary in this case, but it may still have benefits that outweigh the costs and effort.
Step 4) Business as usual
At this stage, you will choose the Colombian real estate asset that best suits your needs and investment goals and conduct the real estate due diligence/transaction/closing as per normal, Colombian standards. It’s also smart to set up any POAs to your attorneys at this stage as well so that they can sign on your behalf any other documentation/process that will be needed to get your asset into an income producing state.
While the goal of a tax-deferred retirement plan is to grow the assets free of taxes, one must remember that Colombia is indifferent as to whether your USA investment vehicle is tax-free/tax-deferred. If there is a Colombian asset that is producing income and profit then the owner of that asset should be taxed accordingly.
If the owner of your Colombian asset is a local corporation (SAS) then profits will be taxed at a corporate tax rate which can reach as high as 34%. If the owner of your asset is your SD-IRA (directly) or via a SD-IRA LLC then it is treated as a non-resident foreign entity and can be taxed 15% or 35% depending on how the investment is set up. At Casacol, we’ve specifically hired Deloitte (formerly Deloitte and Touche) the global accounting/tax firm and leading tax advisor in Colombia to provide us with the legal/tax concepts that explain how to structure this properly. Please contact me for a tax consultation if you’d like me to explain this better, [email protected].
Note: We have met a number of clients who have been told by local lawyers/accountants that if their SD-IRA LLC holds the Colombian asset directly that there is no Colombian income tax associated with the investment profits. While I wish it were the case, this is not accurate and as mentioned above the local income tax rate, in this case, will range between 15-35 %. Again, please consult me directly if you need clarification.
Remember that while the IRS allows you to freely invest abroad in this fashion, there are fairly strict rules after you’ve made the investment. While you can enter the apartment, renovate it, rent it, sell it, etc., you cannot benefit or enjoy the asset directly in any way and neither can your family. Meaning? Essentially you can’t use it, can’t stay in it, can’t retire in it, only receive the income produced as long as the income is managed by your custodian. The full IRS opinion on this topic is here.
This article is intended to be a “work in progress” while we at Casacol continue to monitor the process and rules for American self-directed retirement savings plans investing in foreign (Colombian) assets. We have a number of clients who have successfully utilized their retirement funds in this way (about 5-6) and we manage the legal and accounting aspects for about 35 SAS corporations/clients.
Please don’t hesitate to contact me at any time for further information or clarification.
Juan Jose Giraldo – [email protected]
Legal Director – Casacol Medellin