Investing in Airbnbs has become an increasingly popular way for property owners to generate additional income. With the right property and strategy, a short-term rental can yield double or triple the cash flow of a traditional long-term rental. By furnishing a property, adding guest amenities, and listing it on platforms like Airbnb or VRBO, even average investors can transform into boutique hoteliers.

But is it possible to hold real estate in an IRA or 401(k) and operate an Airbnb within these tax-advantaged accounts without incurring penalties, fees, or taxes? Let’s break it down.

Basics of Real Estate Investing with an IRA or 401(k)

Self-Directed IRAs and Solo 401(k)s

While most IRAs and 401(k)s are managed by financial advisors who might discourage real estate investments, the tax code permits holding real estate in these accounts. This is where self-directed IRAs and solo 401(k)s come in, allowing for greater flexibility.

As Maggie Polisano, founder of CamaPlan LLC, explains:

“They tell you it’s not possible because they can’t earn commissions on real estate. But the truth is, the tax code allows it.”

If you have funds in a traditional IRA or 401(k), you can transfer them to a self-directed IRA or solo 401(k) without incurring penalties, as long as you stay within the same account type (e.g., Roth to Roth). Solo 401(k)s, however, are typically available only if you’ve left your employer or have a business that qualifies for such a plan.

Be Aware of UBTI (Unrelated Business Taxable Income)

Investors using retirement accounts for real estate must navigate Unrelated Business Taxable Income (UBTI), a tax on income the IRS considers unrelated to retirement savings. This can significantly impact the profitability of an Airbnb.

“UBTI is the ‘gotcha clause,’” warns Polisano. “It can defeat the tax-advantaged purpose of an IRA or 401(k) if you’re not careful.”

Key Rules for Investing in Real Estate with an IRA or 401(k)

1. You Can’t Live in the Property

Neither you nor your family members can use the property. This includes parents, siblings, children, or grandchildren. Even partial ownership through your IRA prohibits personal use.

2. You Must Be a Passive Investor

Retirement account rules require a hands-off approach. This means no DIY repairs, tenant interactions, or direct involvement in operations. Hiring a professional property manager is essential.

3. All Transactions Must Stay Within the IRA or 401(k)

- The purchase price, closing costs, and ongoing expenses (e.g., property taxes, insurance, and repairs) must be paid entirely from the IRA or 401(k).

- Income generated by the property must remain in the account.

- Out-of-pocket contributions can trigger taxes and penalties.

Tax Advantages of Real Estate in an IRA or 401(k)

While real estate investments typically offer significant tax benefits, such as depreciation and capital gains exclusions, these advantages don’t apply within a retirement account. The reason? Income within an IRA or 401(k) is already tax-sheltered.

“You have to weigh whether the potential profitability of an Airbnb offsets the lack of real estate-specific tax benefits,” Polisano notes.

Financing Challenges: Using Mortgages

Obtaining a mortgage for a property held in an IRA or 401(k) can be tricky. Most lenders prefer to work with individuals rather than retirement accounts, and financing can also trigger UBTI.

Creative strategies, like purchasing properties “subject-to” existing mortgages or through foreclosure, might offer alternatives, but such approaches require expert legal and tax guidance.

Operating an Airbnb in Your IRA or 401(k): Dos and Don’ts

Repairs and Decoration

You can select contractors, handymen, and designers, but you cannot perform repairs or decorate the property yourself. This ensures compliance with passive investment rules.

Liability Protection

To minimize risk, consider holding the property through an LLC owned by your IRA or 401(k). Any liability insurance premiums must be paid from within the retirement account.

Guest Interactions

Avoid direct involvement in hosting, such as communicating with guests or providing personal touches. Using an LLC or professional property manager can help maintain compliance.

Hiring a Property Manager

Engaging a professional Airbnb manager ensures that the property operates hands-off, meeting IRS requirements and avoiding UBTI.

“It’s an additional expense, but it’s far less costly than a UBTI bill,” Polisano emphasizes.

CamaPlan LLC: Your Self-Directed IRA Partner

CamaPlan LLC specializes in self-directed IRA and solo 401(k) administration, enabling investors to diversify their retirement portfolios with alternative assets like real estate, private lending, and more. Based in Ambler, PA, and serving clients nationwide, CamaPlan empowers investors to take control of their financial futures. Visit www.camaplan.com to learn more.

Disclaimer: The information provided here is not intended as tax, legal, or financial advice. Always consult with qualified professionals before making investment decisions. https://bostonrealestateinvestorsassociation.com/airbnb-investing-with-an-ira-or-401k/