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Vacation Rentals in Your Self-Directed Plan

As the end of COVID-19-related travel restrictions near, we may see an increase in demand for vacation rentals. This could be an opportunity for your self-directed IRA, Solo 401(k), or Health Savings Account.

Real estate can be a lucrative and diverse asset for your portfolio. Just as rental properties and fix-and-flip projects are common in tax-advantaged plans, so are vacation rentals. Companies like Airbnb and Vrbo have tapped into vacation rental demand through their fractional renting platforms.

Do you own and operate vacation rentals with your personal money, or have you thought about it? In either case, you might be surprised to learn how simple it can be with your retirement plan.

Ready to buy property with your retirement plan? Click here to open a new self-directed account in a matter of minutes!

Finding a Property

As would be the case outside of your tax-advantaged account, you have the power to browse and choose a property that meets your investment criteria. The key difference will be that, once you’re ready to close the deal, your account will be the “owner” instead of you. The contract and cash flow must reflect this. Earnings derived from the investment must flow directly back to your account. Likewise, any expenses must be paid by the account.

Apart from these key differences, you, as the self-directed investor, would decide on every other aspect of the investment, much as you would with vacation rental investing outside of your account.

Open for Business

Once your account acquires a property, you can post it on the vacation rental site(s) of your choosing, like Airbnb or Vrbo, and set your desired parameters (per-day price, pet policy, etc.). The beauty of using your tax-advantaged plan means you won’t owe any taxes on those earnings, provided they flow directly back to your account and not to you personally.

Some exceptions may apply, notably should you elect to use a mortgage in purchasing the asset with your self-directed account. Should you go this route, you may become eligible for unrelated business income tax (UBIT). Click here to learn more about UBIT.

A Vacation Paradise for Yourself?

Unfortunately, the IRS prohibits a self-directed account holder from making personal use of account-held assets. This would be, in essence, double dipping, with you as the tax-advantaged investor receiving economic benefit untaxed, as it would otherwise be in open commerce. For self-directed vacation rental investors, you could not use the property nor could any disqualified persons.

In-Kind Withdrawal in Retirement

If it sounds too restrictive to not be able to use the property yourself, please note that this would not be permanent. Once you retire or elect to begin withdrawing from your retirement account with a “distribution in kind,” essentially distributing portions of the property, you will have access to the property and could begin personal use without selling it.

Upon doing so, the asset would become your personal property and be available for your unencumbered use. In the meantime, the property could provide tax-advantaged income over many years before becoming entirely yours, essentially the pot of gold at the end of the rainbow following a lifetime of hard work.

Contact NDTCO to Learn More

We’re here to help make your real estate investing goals a reality. Don’t hesitate to give us a call at 877-742-1270 or send us a message through the Client Portal if you have any questions.

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