plan purchasing real estate

[Guest lip]

Can a 1 person DB plan purchase a home in Costa Rica purely as investment?

[J Simmons]

Purely as an investment?

Who'll manage the rentals? The plan ought to hire a property management firm to keep the plan fom engaging in that business, and having unrelated business taxable income.

The 1 beneficiary of the DB (and family and business associates of that beneficiary) will not be able to use the Costa Rica house, not even if they pay rent.

There will need to be annual appraisals.

You'll also need to see if you can fit under an exception to ERISA sec 404(b) ("no fiduciary may maintain the indicia of ownership of any assets of a plan outside the jurisdiction of the district courts of the United States"), perhaps by using a US bank or insurance company, as the intermediary owning the house.

[Guest lip]

Purely as an investment?

Who'll manage the rentals? The plan ought to hire a property management firm to keep the plan fom engaging in that business, and having unrelated business taxable income.

The 1 beneficiary of the DB (and family and business associates of that beneficiary) will not be able to use the Costa Rica house, not even if they pay rent.

There will need to be annual appraisals.

You'll also need to see if you can fit under an exception to ERISA sec 404(b) ("no fiduciary may maintain the indicia of ownership of any assets of a plan outside the jurisdiction of the district courts of the United States"), perhaps by using a US bank or insurance company, as the intermediary owning the house.

So if plan owns home then we are ng?

[J Simmons]

"ng"--no go? not good? I'm not a text messager, don't know the acronym.

To avoid fiduciary breach, you need to fit somehow into an exception to ERISA 404(b).

[GBurns]

Don't you mean house rather than home?

What is the business/investment rationale behind the purchase?

[J2D2]

And, of course, the 1 person in the db plan is not going to use the house. [Nudge, nudge; wink-wink]

[Guest lip]

Don't you mean house rather than home?

What is the business/investment rationale behind the purchase?

they know real estate and feel it's better than stocks as investment vehicle

[Guest lip]

"ng"--no go? not good? I'm not a text messager, don't know the acronym.

To avoid fiduciary breach, you need to fit somehow into an exception to ERISA 404(b).

sorry about that;ng is "no good"

I'm not a text messenger either actually.

Anyway;if it is forein country home or land is in;is it black and white not allowed?

What might exemption be?

Thanks much

[Guest mjb]

"ng"--no go? not good? I'm not a text messager, don't know the acronym.

To avoid fiduciary breach, you need to fit somehow into an exception to ERISA 404(b).

sorry about that;ng is "no good"

I'm not a text messenger either actually.

Anyway;if it is forein country home or land is in;is it black and white not allowed?

What might exemption be?

Thanks much

I dont understand the issue. Why cant the title to the house be held by a US corp or LLC in which all of the shares are owned by the plan? Since the shares are the indica of ownership by the plan the requirements of ERISA will be met.

Why would anyone pay a bank to hold title to a residence?

[mwyatt]

Googling around on an unrelated search on PTs, came across the following (great) article:

Get Rich "Quick"

[J Simmons]

"ng"--no go? not good? I'm not a text messager, don't know the acronym.

To avoid fiduciary breach, you need to fit somehow into an exception to ERISA 404(b).

sorry about that;ng is "no good"

I'm not a text messenger either actually.

Anyway;if it is forein country home or land is in;is it black and white not allowed?

What might exemption be?

Thanks much

I dont understand the issue. Why cant the title to the house be held by a US corp or LLC in which all of the shares are owned by the plan? Since the shares are the indica of ownership by the plan the requirements of ERISA will be met.

Why would anyone pay a bank to hold title to a residence?

If the house is held by an LLC or S corp (single beneficiary trust as shareholder) owned by the plan, the plan would have UBTI on the earnings. If a C corp, no UBTI but two tiered taxation--once at the corporate level and then on the remainder when it is passed from the plan to the beneficiary.

Might be cheaper to pay a bank.

[Guest mjb]

"ng"--no go? not good? I'm not a text messager, don't know the acronym.

To avoid fiduciary breach, you need to fit somehow into an exception to ERISA 404(b).

sorry about that;ng is "no good"

I'm not a text messenger either actually.

Anyway;if it is forein country home or land is in;is it black and white not allowed?

What might exemption be?

Thanks much

I dont understand the issue. Why cant the title to the house be held by a US corp or LLC in which all of the shares are owned by the plan? Since the shares are the indica of ownership by the plan the requirements of ERISA will be met.

Why would anyone pay a bank to hold title to a residence?

If the house is held by an LLC or S corp (single beneficiary trust as shareholder) owned by the plan, the plan would have UBTI on the earnings. If a C corp, no UBTI but two tiered taxation--once at the corporate level and then on the remainder when it is passed from the plan to the beneficiary.

Might be cheaper to pay a bank.

What earnings will be subject to UBTI?

[J Simmons]

From net rentals of the house, so that it is not a wasting asset.

Appreciation in value from the time acquired by the plan until sold.

[Guest mjb]

From net rentals of the house, so that it is not a wasting asset.

Appreciation in value from the time acquired by the plan until sold.

If the rental income and gains are paid to the IRA as dividends from a LLC where is the UBTI. In the Swanson case the IRA owner formed a DISC where the IRA owned all of the stock. The DISC declared dividends from its profits which were paid to the IRA and were not taxed because the IRA was tax exempt.

[J Simmons]

As I recall, Swanson was a ruling that there was no PT. I don't recall any UBTI issue in Swanson.

[jpod]

Aren't rent and gains from the sale of appreciated property held for investment (i.e., not inventory) excluded from UBTI by Section 512?

[J Simmons]

Generally, yes, rents and gains from the sale of appreciated property would be. But what would the plan own if a corporation or LLC was formed? The plan would own stock or LLC interest, the corporation or LLC would own the rents and the gains from the sale of appreciated property. If the plan sold the stock or LLC interest at a gain, that would be exempt from UBTI. However, dividends paid by the corporation to the plan or flow-through income to the plan from the corporation or LLC generated off of rents and gain appreciation would not be exempt for the plan. To skirt the rule prohibiting a trustee from holding investments over which US courts do not have jurisdiction through the use of a corporation or LLC backs you right into the UBTI or corporate level taxation.

[jpod]

The LLC would be a disregarded entity for Federal tax purposes, so the income characterization at the LLC level would be attributed to the Plan, and there would be no UBTI.

I can't imagine why anyone would ever go to the trouble of creating a corporation to hold the property, but if they did clearly corporate dividends/distributions are also exempt from UBTI under the 512 rules.

[Guest mjb]

Generally, yes, rents and gains from the sale of appreciated property would be. But what would the plan own if a corporation or LLC was formed? The plan would own stock or LLC interest, the corporation or LLC would own the rents and the gains from the sale of appreciated property. If the plan sold the stock or LLC interest at a gain, that would be exempt from UBTI. However, dividends paid by the corporation to the plan or flow-through income to the plan from the corporation or LLC generated off of rents and gain appreciation would not be exempt for the plan. To skirt the rule prohibiting a trustee from holding investments over which US courts do not have jurisdiction through the use of a corporation or LLC backs you right into the UBTI or corporate level taxation.

IRS pub 598, P8 states that all dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts and other similar income are excluded in computing UBTI, excluding unrelated debt fianced income

[J Simmons]

C Corp dividends escape UBTI because the C Corp pays income tax itself. So interjecting a C Corp between the plan and the Costa Rica house (to skirt a requirement Congress imposed on fiduciaries so that US courts would have jurisdiction over assets in order to protect plan beneficiaries) would come at the cost of the C Corp level income taxation.

If the entity used is not a C Corp, UBTI generally applies to its income passing through to the plan.

The OP posited a 1-person DB. If that 1 person is the owner of the sponsoring employer, Title I of ERISA might not apply. If so, then ERISA sec 404(b) would not apply. Yet you'd be subjecting the investment to C corp level taxation on its income, or risking UBTI if another type of entity is so used.

If that 1 person is not the owner (or spouse), ERISA applies. Would you really suggest that the fiduciary of the DB use a corp or other entity in order to skirt the protections for plan beneficiaries that Congress put in ERISA 404(b) to give US courts authority over plan assets? I certainly would not be so advising an ERISA plan sponsor or fiduciary without strong court precedence that such a circumvention of legislated policy may be done with impunity.