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Airbnb Investments with Your IRA

airbnb investments with ira

What is Airbnb?

Airbnb is an online platform that offers lodgings to tourists. Many of us frequently use Airbnb to book a vacation stay. The company itself does not own any of the real estate properties listed on its platform. Instead, Airbnb acts as a broker, receiving a commission for each booking that is made through its platform. Rather than spending a vacation in a small room at a hotel, tourists can choose a home locally, and often more affordably.

Airbnb as an Investment with IRA

If you’re a savvy investor, you may be interested in using your personal funds to invest in a property, post it on Airbnb or a similar platform, then sit back and reap the profits. But rather than using your personal funds, use funds in a tax-advantaged IRA. If you haven’t used your IRA funds for investments, you may wonder what difference it makes.

By using your IRA funds, you can enlist a third-party to rent out the Airbnb property on your behalf. As a result of using your IRA, all income and gains associated with the investment will flow back to your IRA tax-deferred or tax-free (Roth IRA). That is the primary advantage of using retirement funds to make any type of investment: you will not pay tax on the income and gains associated with the property.

There are two things to keep in mind when using IRA funds to invest in a property, and have a third-party rent it out for you.

  1. You will need to establish a Self-Directed IRA through a passive custodian.
  2. Unrelated Business Taxable Income (UBTI) – you may be hit with a tax that can be as high as 37%.

Investing in Airbnb with a Self-Directed IRA

Now that you know you can invest in Airbnb with your IRA, it’s important to note that you cannot purchase real estate with a Traditional IRA. This is because Traditional IRAs are setup through banks and financial institutions that do not sell real estate or any other alternative asset. Instead, they sell traditional investments, including stocks, bonds and CDs. If you wish to invest outside of that realm, you will be hard-pressed to find a bank or financial institution that will allow this.

But if you establish a Self-Directed IRA through a passive custodian, also known as a Self-Directed IRA custodian, you can make any investment that is IRS approved. This includes traditional investments (stocks, bonds, mutual funds, etc.) as well as alternative investments (real estate, cryptocurrency, precious metals, etc.). Passive custodians, such as IRA Financial Trust Company, allow IRA holders to engage in all types of investments. Furthermore, they never give investment advice or sell investment products.

Note: banks and financial institutions may claim to offer a “self-directed” IRA, but not in the true sense of the term. You still will not be able to invest in alternative assets.

Airbnb Investments – UBIT Tax?

Generally, when you use your retirement account to buy real estate, you don’t pay tax for any income or gains of the investment. However, there is one exception. There is a little known tax called the Unrelated Business Taxable Income (UBTI) tax. Not many know of this tax, as it only applies to a small group of investors.

The UBTI rules state that if you invest in real estate activity that involves leverage (nonrecourse loan), or your activity rises to the level of a trade or business, the passthrough tax treatment (tax-deferred or tax-free income/gains) will no longer apply. Instead, the Unrelated Business Taxable Income tax will apply, which can be as high as 37%. In other words, if the income generated from your investment seen as business-related and not passive, the IRS will tax you as a business.

The third instance where you may be hit with UBIT tax is if you use margin to buy stock, which does not apply in this context.

How to Determine if Your Airbnb Activity is Passive

If you have invested in Airbnb and have not taken out a nonrecourse loan, you must determine whether your activity is considered passive. Let’s turn to the tax code to get the answer.

According to IRC section 512, if you do not provide services that a hotel would provide (turndown service), you most likely will not be hit with UBIT tax. Typically, turndown service includes housekeeping, cleaning your guest’s clothes, changing the sheets, etc. But utility, such as heat, water and electricity do not count as such service, thus you will not be hit with UBIT. You are providing to the IRS that you are generating rental income, which is one of the five types of income that are not subject by UBIT.

Learn more about Airbnb investments becoming subject to UBIT.

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