Entrust Learning Center > 7. Case Studies > Case Study: Purchasing Beachfront Property in Panama

Case Study: Purchasing Beachfront Property in Panama

By: Hugh Bromma, Founder and CEO of The Entrust Group

IRA & 401(k) Insights

Sarah and Bill have heard about beachfront properties in Panama and they have a plan to retire there one day. They want to use their IRAs to fund a real estate investment in Panama, but they would also like to live in the property after they retire. If they pool their IRAs, they can buy a property outright, with each of their IRAs owning a portion based on the percentage contributed. If they want a bigger property, they can include friends’ IRAs or personal funds in the deal, or take a non-recourse loan. One way to make the transaction is to form an entity, such as a corporation or trust, to hold the property for the IRAs. In that scenario, the collective IRAs would be stakeholders of the entity.

Sarah and Bill travel to Panama to check it out. They have a great time exploring the country and looking at real estate. As luck would have it, they find a property they both agree on. Because Sarah and Bill already have self-directed retirement accounts at Entrust, they complete a Buy Direction Letter to instruct Entrust to purchase the property with their IRAs. Their IRAs will take title once the transaction is complete. Their representatives must work with Panamanian attorneys and title companies to ensure that the IRAs have ownership and that all income and expenses are properly credited and debited to their IRAs.

After a few years, Sarah and Bill look into taking out a loan to buy an even bigger property in Panama. They discover that all debt used for acquiring property in an IRA must be non-recourse. They also learn that when borrowing for a foreign real estate investment like this, many investors have their legal counsel put together a corporation or foundation, which will in turn be owned by the IRA. In that case, the corporation or foundation becomes the borrower, with property income and expense flowing through the IRA-owned entity. Any debt-financed property like this, regardless of where it is located, may be subject to unrelated debt-financed income tax in the United States.

The most difficult part of the process for Sarah and Bill is that during the time the property is owned by their IRAs, they can’t live in it, or even stay there for a few days. Their parents, children, and children’s spouses can’t stay at the property either—they are all disqualified persons. In the meantime, the property manager they hired will maintain the house. Sarah and Bill decide to rent the beach house to tourists and they make arrangements with their property manager. The rental income goes back into their IRAs. All maintenance expenses are taken from the IRAs and performed by third parties to prevent any prohibited transactions.

When they retire to their beachfront property in Panama in six years, Sarah and Bill first need to take a complete distribution of the property owned by their IRAs, which becomes a taxable event for U.S. tax purposes. The fair market value of the property is added to their taxable income in the year of distribution. However, if they used Roth IRAs to purchase the property, they will not have to pay taxes on the distribution. The distribution is a net asset value, so if Sarah and Bill have a debt against the property, the distribution amount will be based on the fair market value minus any mortgages. The couple has successfully set themselves up to make their dream of retiring on the beach in Panama come true.

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