Question: Thank you for your article on IRA myths: http://www.eldr.com/blogs/its-your-ira/top-10-self-directed-ira-myths-debunked
I have a 300k self directed IRA at Schwab, but I am intrigued by a non-stock market investment alternative.
I’m aware of a 300 acre orchard for sale in Belize for 400k. Your article mentioned that debt can be used in the IRA and then tax must be paid on the portion of the investment funded by debt. I presume it would be prudent to borrow around 200k to fund the business with working capital. Do you have a suggestion on the legal entity best suited for this scenario, the order in which transactions should occur, etc. Is there a book that spells out doing this?
Answer: Thank you for your question. I do not know of a book spelling out how to do a debt-financed transaction in a foreign country, though there are certainly books on international investing. Typically what we see at Quest IRA is a local corporation or other entity formed to hold the investment, and the IRA owns the shares of the entity. Of course this implies that you have someone down in Belize to manage the entity for you.
I am not sure what the banking situation is down there and whether or not you could borrow money with a 50% down payment, so that is one thing you would need to investigate. The tax situation is another factor. You will want to understand the local tax implications of any investment. As far as the IRA being taxable, that does apply when either the IRA owns a business which is non-taxed at the business owner level (i.e. either it is directly owned by the IRA or the IRA invests in a non-taxed entity such as a partnership or an LLC), or when the IRA rents personal property (rents from real property are exempt), or when the IRA owns debt-financed property either directly or through a non-taxed entity. Depending on how you structured the transaction, it may be possible to avoid the Unrelated Business Income Tax (UBIT) if the IRA invests in a taxable entity. More information on this topic may be found in IRS Publication 598, which is freely available at www.irs.gov, or by reviewing Internal Revenue Code Sections 511-514. I have also attached some information for you to this email. Of particular interest to you may be the following paragraph in the AICPA Planning article attached: (Found on www.QuestIRA.com)
Exempt organizations can also avoid the debt-financed property rules by investing in such property through a foreign corporation. In PLR 9952086, an exempt organization held 100% of the stock in a foreign corporation that invested in a foreign corporation that invested in a U.S. partnership holding debt- finance securities. The Service held that the dividends paid by the foreign corporation to the exempt organization were excluded from UBTI as dividends under Section 512(b)(2) and were not debt-financed income because the exempt organization had not incurred debt to acquire its interest in the foreign corporation.
In a series of three recent private letter rulings, the Service has again concluded that dividends received from a foreign corporation is tax-free dividend income even if the foreign corporation borrows to invest in securities. See, e.g., PLR 200251016 (Sept. 23, 2002); PLR 200251017 (Sept. 23, 2002); PLR 200251018 (Sept. 23, 2002); PLR 199952086 (Sept. 30, 1999).
Good luck with your investments, and have a great day!