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Are the Airbnb Investment Properties in Your Self-Directed IRA Subject to Tax?

Are the Airbnb Investment Properties in Your Self-Directed IRA Subject to Tax?

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Just last month, Airbnb celebrated half-a-billion guest arrivals at its more than 5 billion listings in 191 countries and 81,000 cities worldwide. Airbnb hosts who rent out a bed, a tent, an apartment or house, have earned $65 billion over the company’s 12-year history.

How much of that $65 billion was earned by people who use their self-directed IRAs to own and rent out properties on the platform? It’s impossible to say, but it could be a lot. And, it could be you earning that tax-advantaged revenue.

Short-term rental platforms like Airbnb, HomeAway, and VRBO didn’t exist when IRAs were created in 1974. But the IRS has always allowed investors to own real estate in their tax-advantaged retirement savings accounts and to benefit from the tax-advantaged revenue. Historically, those properties—single- or multi-family residences, commercial properties—have been used for long-term rentals. Increasingly, investors are now taking advantage of the revenue stream offered by short-term rentals.

That revenue stream, however, could have tax consequences.

The rent from long-term rentals is specifically excluded from what is called “unrelated business income tax” or UBIT that the IRS imposes on investments owned by tax-exempt entities or accounts that are otherwise treated as a tax exempt, like IRAs.

Short-term rentals, however, may be subject to UBIT. While the rules governing UBIT are complex, and the IRS is still catching up to the popularity of short-term rental platforms, a few guidelines are becoming clear. [See Treasury Reg. § 1,469-1T(e)(3)(ii)] Generally, short-term rental income will be considered UBIT when the average rental period is:

  • Seven days or less
  • 30 days or less and significant personal services are provided with the rental

You can avoid the seven-day trigger by imposing a longer minimum stay in your property, as well as you can tailor your offering to avoid “personal services.” It is always highly recommended to consult with your tax advisor on the reportability of the income received.

Defining “Personal Services”

It’s clear that providing the basics—heat, light, and water—does not constitute services that would trigger UBIT. The same goes for cleaning the residence between guests.

Generally speaking, services that are provided for the guests’ convenience would trigger UBIT. Examples include providing breakfast or providing regular maid services during a guest’s stay. This kind of service transforms the property into something more like a hotel than a short-term rental.  If the income received from a property held under an IRA is considered Trade or Business income, it will be subject to UBIT.  If the gross income received is less than $1,000, the IRA will not have to file a return.  On the other hand, if the gross income is $1,000 or more, the IRA will have to file a tax return using the IRS Form 990-T and pay the tax on the income.

With some short-term rental platforms now expanding to include “experiences” offered by hosts to guests (home-cooked meals, bike tours, wine tastings), it would be wise to consult with a tax attorney about the UBIT consequences of these services before offering them.

Local taxes may loom

Many cities are waking up to the competition that short-term rental platforms pose to more traditional hotels, and to the degree to which these rentals remove housing stock from the long-term rental market. As a result, more cities have become more vigilant about requiring property owners to register as businesses and to pay local taxes of various sorts.

While firms like Airbnb and HomeAway facilitate the collection of these taxes, as well as report income received on an IRS Form 1099-K, local taxes are another factor to keep in mind as you consider the use of your IRA-owned real estate. 

Plan and seek advice before listing

Listing your “stunning seaside cottage” or your “trendy downtown loft” for short-term rental may be another way to leverage the revenue-generating capacity of real estate owned by your self-directed IRA. But first, check with your tax or financial advisor about UBIT as well as get up to speed on local laws and restrictions.

The gains received from accumulating income from these investments under your IRA may eventually be distributed for your retirement income.  The taxation of the distribution will depend on whether you invested under a Traditional IRA or Roth IRA. 

Then, imagine being able to use the income your IRA earned and continues to earn for your own travel adventures in retirement, when you are ready to spend a month in a “house among the olive trees.”

Feel free to reach out to us at 800-392-9653, option 2, or fill up our free consultation form here so we can answer any questions you have.

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