Using a Self-Directed IRA to Lend on Costa Rica Real Estate

A self-directed IRA can hold more than stocks and funds. When the custodian permits it, the account can also make a private loan, including a loan secured by real estate in Costa Rica. The IRA, not you, is the lender, and the interest goes back into the account. This guide explains how lending from a self-directed IRA on Costa Rica real estate works with a loan arranged through GAP Investments, and what to check with your custodian and tax advisor first.

The IRA is the lender

When a self-directed IRA funds a loan, the account holds the loan. Interest is paid to the IRA, and the principal returns to the IRA when the loan is repaid. You do not receive the payments personally. Before anything else, ask your IRA custodian whether it can hold a private loan secured by property outside the United States, which documents it needs, and how it signs and funds the loan.

The loan itself works like any other loan arranged through GAP Investments. Loans start at US$50,000, run from 6 months to 3 years and pay monthly interest only, with the principal due at maturity. Rates range from 9% to 16% a year and are set for each loan. All loans are in US dollars.

Prohibited transactions: check before you fund

The IRS describes a prohibited transaction as any improper use of an IRA by the IRA owner, a beneficiary or a disqualified person. Its examples include borrowing money from the IRA, selling property to it, using it as security for a loan and buying property for personal use with IRA funds. Disqualified persons include the IRA owner’s fiduciary and family members: a spouse, ancestors, lineal descendants and the spouses of lineal descendants.

For a Costa Rica loan, that means the borrower should be an unrelated third party, and no one connected to you should benefit personally from the property. According to the IRS, if an IRA owner engages in a prohibited transaction, the account stops being an IRA as of the first day of that year. Your custodian and a qualified tax advisor should confirm that a specific loan is allowed before your IRA funds it. This article is general information, not tax or legal advice.

What secures the loan

Each loan is secured by a first-position mortgage on titled property registered in Costa Rica’s National Registry. GAP determines the value used for the loan, with the lender’s input and acceptance, and lends no more than 50% of that value. Around 30% or less is preferred. That cushion protects the IRA if the borrower stops paying and the property has to be sold. Enforcement takes time and money, and no outcome is guaranteed.

Points to review in each file:

• Loan-to-value: how far the loan sits below the value GAP determined.
• The property: title, access, services and how easily it would sell.
• The exit: how the borrower plans to repay the principal at maturity.
• The rate: a higher rate usually reflects more risk in the file, not a better loan.

Our guide to loan-to-value in private lending explains why that ratio matters most.

From approval to closing

Once your custodian approves the investment and the terms are agreed, a Costa Rican attorney prepares the loan documents and registers the mortgage. Case by case, GAP can work with your custodian and attorneys on the documents and the closing. GAP closes loans within 10 business days once the required documents are complete; your custodian’s own processing time comes on top of that. The borrower pays the loan fees, which are deducted at closing. Early repayment has a penalty; the amount and conditions depend on the lender and are explained during loan review.

Keep the timing in mind as well. A loan runs from 6 months to 3 years, and the principal comes back to the IRA only at maturity or when the borrower repays, so that money is not available to the account before then.

Frequently Asked Questions

Can my IRA lend to someone I know?

Ask your custodian and tax advisor before lending to anyone connected to you. The IRS treats improper use of an IRA by the owner, a beneficiary or a disqualified person as a prohibited transaction.

Where do the interest payments go?

To the IRA. The borrower pays the account, not you personally.

What is the minimum loan?

US$50,000. Above US$1 million, extra paperwork and due diligence are required.

Can I stay at the property?

Ask your custodian first. The IRS lists buying property for personal use with IRA funds among its examples of prohibited transactions, so any personal benefit from the property should be reviewed before the IRA lends.

New to lending? Start with our guide to private money lending in Costa Rica. GAP has arranged property-backed loans in Costa Rica since 2008.

WhatsApp us at +506 4001 6413 to get started, call or email info@gap.cr.

Article by Glenn Tellier (Founder of CRIE and Grupo Gap)