27 Aug Can I use my IRA to buy a vacation home overseas?

Q. I am interested in buying a vacation home abroad. Can the property be considered part of a retirement portfolio such as buying it with an IRA. I also want to avoid having the money used to be counted as taxable income. Are there any tax breaks available to finance the purchase such as taking a loan or mortgage?
— Dreamer

A. There are two issues here. The first is the vacation home abroad. The second is using your IRA to acquire tangible assets.

First, the real estate abroad.

There are two tax benefits to owning real estate. The first is the home mortgage interest deduction, and the second is the deductibility of real estate taxes.

In order to take advantage of these deductions, you have to itemize your deductions, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

“At the end of 2017 a new tax law was passed that went into effect in 2018,” he said. “Because of this law, fewer taxpayers are itemizing their deductions because of the increase in the standard deduction coupled with the $10,000 limit on state and local tax (SALT) deductions.

Furthermore, Kiely said, the new tax law limits the total size of your mortgage for which you can deduct interest. Prior to 2018, you could deduct interest on up to $1 million in mortgage indebtedness. For real estate purchased after Dec. 15, 2017, the new limit is $750,000.

“If you own personal real estate in a foreign land the above deductions and the limitations applied to them still apply to you,” he said. “The fact that the house is in a foreign country does not matter.”

Now let’s look at the issue of using your IRA to purchase tangible assets.

Kiely said in order to keep your IRA from becoming taxable income, it must be maintained by a qualified custodian. A qualified custodian must be a bank or a brokerage firm.

“Most qualified custodians will only allow you to invest in stocks, bonds, mutual funds, insurance policies or bank accounts,” he said. “They won’t let you invest in `things.’ By `things’ I mean actual real estate, cars, art or collectibles.”

There are a few custodians that will allow you to move your IRA to them and then invest in “things.” These accounts are known as self-directed IRAs and custodians charge high fees for this service.

Then, the “A” in IRAs stand for arrangements, and the IRS has very stringent rules regarding who an IRA can enter into an arrangement with, he said.

“These rules contain a list of ‘Disqualified Persons.’ These persons are persons the IRA account can’t enter into an arrangement with,” he said. “The first person on this list is the account holder (you) or the account holder relatives.”

This means you or one of your relatives can’t sell something to your IRA even if it was valued at its fair market value, he said. If your IRA acquired rental real estate you couldn’t manage it. Your IRA would have to hire a manager.

“You couldn’t mow the lawn or shovel the snow; your manager would have to hire someone to do it,” Kiely said. “So, if your IRA purchased a vacation house in a foreign country, you couldn’t live in it. Not even for a day.”

Also remember that if you take funds from the IRA – a traditional IRA, not a Roth IRA – the distribution would be taxed as income.

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This story was originally published on August 27, 2019.

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