Airbnb Investment with a Self-Directed IRA – What You Need to Know
In this article, we talk about how to make an Airbnb Investment using a Self-Directed Individual Retirement Account.
Airbnb Investment – A Smart Choice
Over the last several years, a growing number of self-directed IRA and solo 401(k) plans look to make investments in short-term rental properties on popular websites such as Airbnb and HomeAway.com. The idea about using retirement funds to make the investment is that all income and gains will be tax-deferred. In the case of a Roth IRTA or Roth 401(k) Plan, it’s completely tax-free.
Airbnb is the most popular short-term rental site. Since the company launched in 2009, it has grown from helping 21,000 guests a year find a place to stay to helping six million a year. Currently, it lists a staggering 800,000 properties in 34,000 cities across 90 different countries.
Why Choose a Self-Directed IRA
Since the creation of IRAs in the early 1970s, the IRS has always permitted a real estate IRA to purchase, hold, or flip real estate. By using a Self-Directed Roth IRA to buy real estate, you can purchase real estate or flip homes tax-free and without requiring custodian consent!
A traditional IRA custodian (financial institution) will not allow you to purchase real estate using your IRA or retirement funds. Therefore, in order to have the ability to engage in house flipping transactions using retirement funds, a Self Directed IRA LLC is a great option.
Typically, most passive investments that your Self-Directed IRA might invest in are exempt from UBTI. Some examples of exempt type of income include:
- Interest from loans, dividends, annuities, royalties
- Most rentals from real estate, and gains/losses from the sale of real estate
However, the following types of income could subject a Self-Directed IRA to the UBTI tax:
- Income from the operations of an active trade or business through a passthrough entity, such as an LLC.
- Using a nonrecourse loan to purchase a property (there is an exception for a 401(k) plan)
- Using margin on a stock purchase
You May Avoid the UBTI Tax
The IRS does not offer much guidance on the use of Self-Directed IRAs and short-term rentals, such as Airbnb, especially with respect to Unrelated Business Taxable Income Tax (UBTI) rules.
Payments for the use or occupancy of rooms and other space that render services to the occupant don’t constitute rent from real property.
Rent from Real Property:
- The use or occupancy of rooms in hotels, boarding houses, or apartment houses furnishing hotel services,
- Tourist camps or tourist homes
- Motor courts or motels,
- Occupancy of space in parking lots, warehouses, or storage garages
Generally, services are considered rendered to the occupant if they are primarily for his/her convenience. Supplying maid service is an example of this kind of service. However, furnishing of heat and light, cleaning public entrances, exits, stairway and lobbies, etc. are not.
Therefore, it may appear that as long as you provide daily maid services with respect to the short-term renal operation, the investment should not be treated as a hotel or motel type of income stream. As a result, it may generate rental income that’s exempt from the UBTI tax rules.
A Self-Directed IRA to make short-term rental investments via an Airbnb website, for example, may prove to be a great way to invest and generate tax-deferred or tax-free income.
Adam Bergman is the founder of the IRA Financial Group & IRA Financial Trust Company. For more information on this topic please call 800-472-0646.