Owning a Vacation Rental in a Real Estate IRA

We have many clients who successfully own vacation rentals within their Real Estate IRAs and self-directed retirement accounts not just here in North Carolina, but all over the country.

We are blessed indeed to live in North Carolina, a state rich in natural beauty, history and recreation. Naturally, hundreds of thousands of tourists flock to our resort destinations for sailing, golf, fishing, camping, cabin getaways, beach retreats and the like. Here are some of the things vacation rental owners should keep in mind – especially those who hold them within Real Estate IRAs.

1.) Sorry – you can’t stay in the property. The IRS is very strict about using the property for your own benefit or recreation. You can’t. Not even if you pay the IRA the market rent. That would constitute self-dealing and would be a prohibited transaction under IRA rules. This is the same no matter if you hold the property in an IRA, Roth IRA, 401(k), SEP, SIMPLE or any other tax-qualified account. If you stay in the property personally – or allow your spouse, descendants, parents, grandparents, or those of your spouse – to stay in the property, you run the risk of having the entire IRA disqualified. If that happens, you’ll owe taxes and penalties on the whole thing.

Your brothers, sisters, uncles, aunts, nieces and nephews can potentially use the property – they don’t technically fall under the IRS’s prohibited transaction rules. But courts have occasionally ruled against defendants for violating the spirit of the self-dealing restrictions as well as the letter. The best thing to do is to keep your Real Estate IRA property activities strictly separated and segregated from your family’s recreational activities.

2.) Don’t use your own money for repairs and renovations. IRS rules require that your IRA money and personal funds remain strictly segregated. This means you cannot go by the general store to pick up some toilet paper and a couple of light bulbs to prepare your vacation rental property for the next tenant. You must pay for these supplies from the Real Estate IRA itself. You should have a separate checking account for the IRA, or for the entity you set up within the IRA, and it should be entirely separate from your own personal accounts.

3.) Know your licensing and regulatory requirements. Generally, you can’t just buy a home and put an ad up on Craigslist to rent it to short-term renters. You will probably need to get a sales or excise tax license and often a license to operate a short-term rental or resort property. Check with your state department of revenue and your state and local business licensing division for details. Often short-term rentals (six months or less) are subject to a vagrancy tax or other special tax. Some jurisdictions also require you to maintain a visitors’ log and track who stayed in the property and when.

4.) Insurance Issues. A standard homeowners’ policy won’t cut it for a vacation rental policy. You will need to take on additional insurance coverage specifically designed for vacation rentals and short-term tenancies. Speak with an experienced property and casualty insurance professional licensed in your state. Furthermore, insurance premiums must be paid for from within the IRA.

American IRA was built by investors for investors, and brings their successful investment experience to the table, providing excellent educational material showing the public that their self-directed IRA account can invest in a variety of assets such as real estate, private lending, limited liability companies, precious metals and much more.