Last Updated on February 5, 2020
IRA Financial’s Adam Bergman discusses the options you have when using your Self-Directed IRA to invest in an Airbnb property and whether or not you’re subject to the UBTI rules.
For those of you who don’t know, Airbnb allows you to rent out lodging to other people. You can use their website or mobile app to list your house for rent. Alternatively, you can look for lodging for yourself and others as well. As the name implies, it’s akin to the old fashion Bed & Breakfasts. It’s become a popular alternative to hotels and other vacation rentals.
How can Airbnb investments work for you though? If you’ve ever owned an income property, you already know how this works! You may rent out a vacation home by the week or month. Or, you may lease a property on an annual basis. Either way, it’s very similar to how Airbnb works. You don’t need a separate property just for income purposes. You can use your own home instead! If you travel a lot, your home can earn income while you’re away.
Using a Self-Directed IRA
A Self-Directed IRA allows you to invest in just about anything you can think of. One of the most popular types of alternative investments is real estate. The great thing about using retirement funds to invest in real estate is that all the gains flow back into the account tax-free. You only pay taxes when you distribute the funds during retirement. In the case of a Roth IRA, you never pay tax on qualified distributions.
If you make an Airbnb investments with your Self-Directed IRA, you must be aware of the rules surrounding the plan. Previously, we said you can rent out your house using Airbnb. However, when using an IRA for an Airbnb investment, you cannot use your primary residence. This falls under the IRS prohibited transaction rules. Thus, you must invest in a separate property with your IRA funds.
The process is actually quite simple. You open and fund a Self-Directed IRA with a custodian that allows for alternative investments. You then find a property you wish to invest in and use your IRA funds to make the purchase. You can then use the property for investment purposes. As we said earlier, all income generated by the property will go back to your IRA and continue to grow tax-free until retirement.
Lastly, we want to talk about the Unrelated Business Taxable Income, or UBTI. Mr Bergman focuses on this extensively in this podcast. The question becomes, is an Airbnb investment subject to the UBTI tax schedule? Generally, IRA real estate investments are not subject to UBTI unless you use a nonrecourse loan.
Another factor to consider is whether the Airbnb investment is considered a business (and thus subject to UBTI). So long as you’re not providing hotel-type services, such as maid services, you should be safe from the extra taxes. Listen to the podcast as Mr. Bergman explains this in detail.
If you’re looking to use your retirement funds to make Airbnb investments, a Self-Directed IRA is your best choice. Make sure you follow all the rules so you’re not subjected to extra taxes.