Have you ever imagined sleeping in a railroad container or a renovated school bus? These are just some of the quirky, unique stays that you can find on AirBnb! Offering more than 5 million listings, each with their own flair, AirBnb and other short-term rentals are growing into one of the most well-known (and well-producing) investments on the market. It’s no shock that self-directed IRA holders have taken notice.
With these short term rentals, hosts can rent out their properties, whether it be an apartment, house or even a yurt, all while adding their own personal touches and structures. With all of the freedom to make it your own, non-traditional investors are flocking to these assets. And, since the IRS does allow investors to hold real estate in their IRAs, Airbnbs continue to grow as the next great alternative investment for self-directed IRA holders, too.
Holding Real Estate and AirBnb in SDIRAs
Of course by now, many know that it’s possible to hold real estate in an IRA, but it’s important to understand the rules surrounding assets in your SDIRA. Because your IRA holds this assets, it is the one who will need to receive the benefit – all of the benefits. So, what does that mean for you? Rules are put in place that say you, a disqualified person, cannot benefit from the investment. These rules also apply to any disqualified person to your IRA, including your spouse, your lineal ascendants and descendants, and any companies these people own, control, or manage.
What this means is that you could not go live in the property personally, nor would you be allowed to go and vacation at the property your IRA owned. On top of this, you would not be allowed to rent it out to any disqualified person or hire those persons to work on or manage the property, either. The IRS has made it very clear that if you plan to hold an Airbnb or short-term rental in your self-directed IRA, it needs to strictly be for investment purposes only.
Let’s Talk About UBIT
Now that you’re fully aware what you can and cannot do with this investment property, you may think you’re absolutely ready! But let’s make sure you understand one other important factor that surround Airbnbs. Sometimes it can incur a tax – Unrelated Business Income Tax, or UBIT. As the IRS works to catch up with the increasing popularity of Airbnb investments, thankfully the rules surrounding them become more apparent and clearer to understand, which can be found at Treasury Reg. § 1,469-1T(e)(3)(ii).
For short-term rentals, UBIT could apply in some situations. Typically, a UBIT tax will come into play for short-term rentals when the average rental period is 1) seven days or less, or 2) thirty days or less and significant personal services are provided with the rental. Long-term rentals are specifically excluded from this type of tax, in most cases, but in some cases short-term rentals can avoid tax trigger, too. By extending stays for over the 7 day limit and not offering “personal services”, like maid or breakfast services during someone’s stay, UBIT can sometimes be avoided.
“Personal Services” and Running a Trade or Business
Understanding what a “personal service” is can better help you prepare for potential UBIT taxes. It was mentioned that maid services during someone’s stay would be considered a personal service, but more general needs like cleaning in between residences between guests would not be. The same goes for other basic necessities. Providing the basics such as heat, water, and electricity would not be deemed a personal service. Personal services typically come into play when more convenience items and services are provided. When a services could be looked at as more than just a short-term rental (and more like a hotel or motel, for example), UBIT could be triggered.
In some cases, if income generated by a property held by a self-directed IRA is deemed trade or business income, it will be subject to UBIT. What does this mean? IRAs do not have to file a return if the gross income received from the property is less than $1,000, but if it is more than that, the IRA will file a tax return (IRA Form 990-T) and pay tax on the income generated. That is why it’s important to consult with a tax attorney about the potential for UBIT. With most short-term rentals offering more and more personal touches and experiences, like food and laundry services, UBIT could be something you’ll need to factor into your investment plans.
So, Does it Make Sense to Invest in Airbnbs?
Deciding whether or not purchasing an Airbnb or short-term rental in your self-directed IRA is a good idea will ultimately come down to each individual and their understanding of this type of investments. Being able to hold an income-producing asset that is easy to market could be a great opportunity for SDIRA investors – but it’s imperative that you’re familiar with all the rules and potential taxes that come along.
There’s no doubt that gains received from the income your short-term rental have the potential to grow in your SDIRA to create tax-free distributions, but always make sure you’re investing the right way so that you remain safe and compliant! For more information about how to invest into Airbnbs with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.