Investing in Vacation Rentals with YOUR Self-Directed IRA

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Thinking about investing in the vacation rental industry with your self-directed IRA? Yes, money in your existing individual retirement account can certainly be used to buy short-term rental properties — with tax benefits! While there are many investment opportunities you can take advantage of with your pre-tax or Roth IRA, such as bank CDs, stock/bond portfolios, insurance company annuities, and mutual funds, it’s important to consider alternative investments for the best chance of success. The key to diversifying your retirement savings portfolio is using a self-directed IRA. And what better way to invest in YOUR future than using an IRA to buy a vacation home for profit

Note: while our guide offers solid information and tips on buying rental property using a self-directed IRA, please consult your licensed tax, legal, and/or investment advisors to make the best decisions for your personal retirement savings situation.

Self-Directed IRA Explained

A self-directed IRA (SDIRA) is pretty much what it sounds like — your “self” makes investment decisions and directs a trustee or an administrator to invest in traditional and non-traditional assets allowed by the IRS for your retirement plan, be it an IRA, a 401(k), or both. Basically, you call the shots, and a trustworthy third party processes transactions and ensures your investments, investment structures, and titling comply with the IRS code. 

Common Places with Retirement Funds

  • Bank
  • Broker-dealer custodian
  • Insurance company
  • RIA (Registered Investment Advisor) firm
  • Trust company

Accounts with Tax Advantages

  • Traditional & Roth IRAs/401(k)s
  • HSAs (Health Savings Accounts) — only some
  • SEP (Simplified Employee Pension)
  • CODA (Cash or Deferred Arrangement)
  • 457 DCP (Deferred Compensation Plan)
  • 403(b) TSA (Tax Sheltered Annuity)

Using Your IRA to Buy a Vacation Home

With an SDIRA or 401(k), you can buy a second home as another source of income. In fact, investing in commercial or residential real estate is the most popular asset class in self-directed retirement plans. 

By using your IRA to buy rental property, you’re able to create a diversified retirement portfolio while using any personal, non-retirement savings for other expenses. And since any vacation rentals would be purchased, owned, and sold by the traditional or Roth IRA, your capital gains would be sheltered, and your retirement account would earn tax-deferred or tax-free income! 

Pro tip: when using retirement funds to buy a house, you may be able to tap into a 401(k) from a previous employer using a self-directed IRA if the original plan incorporates self-directed options.

Investment Options

  • Warehouses
  • Undeveloped land & farmland
  • Rental property — cabins, condos, large houses, etc.
  • Rehabs & foreclosures
  • Mobile homes
  • Lease options

What’s Not Allowed by Owners 
Additional disqualified persons would include the account holder’s spouse, children, parents, fiduciaries, and most related parties. 

  • Using a personal guarantee (if financed) for the property loan
  • Living on or utilizing the property for personal use at any time
  • Leasing, flipping, or making repairs through a business you own
  • Paying expenses for the property with your personal money
  • Listing or selling the property as a real estate agent or broker

Are Vacation Rentals a Good Investment with IRAs?

While you can buy real estate with an IRA, should you? Well, it depends on your personal financial situation and retirement plans. However, if you already have property investments beyond your existing retirement account or have extensive knowledge of the real estate market, investing in vacation rentals with your self-directed IRA could be a good investment for you. 

Understand Before You Buy
Before leaping into real estate investments in the vacation rental industry utilizing your self-directed IRA, it’s vital to do more research. Look into any tax advantages with your current retirement accounts, learn how self-directed transactions work (more on this below), and become familiar with how your retirement accounts could accept returns/dividends from your vacation rental investment. 

3 Steps for Self-Directed Transactions

Let’s dive into how self-directed transactions work with SDIRAs when purchasing an investment property.  

Step 1: Open Account
Find a self-directed IRA administrator or trust company with plenty of experience and a high level of expertise with IRA transactions and real estate. You should also look into what kinds of services they offer and any fees they may impose. Be sure to ask for references and consider speaking directly with one of their real estate IRA owners before opening an account.

Once you create an account, your self-directed IRA will become the investor — with its own name and tax ID number — and holder of the asset. 

Step 2: Transfer Funds
As the most time-consuming part of the process, funding the account can be exhausting and even frustrating at times as transfers are made from custodian to custodian and cannot be initiated by you. Involved parties would be your administrator/trust company and any 401(k)s or other employer-sponsored plans (if allowed). 

For rollovers, you will need to instruct the former custodian to distribute the funds. For transfers from one IRA to another like IRA, your administrator/trust company will need to initiate, and this can take 2-6 weeks from start to finish. To help speed up the process, ask your current IRA custodian if they require a transfer form and/or a Medallion Guarantee stamp and if they accept fax requests. 

As for directly funding the new self-directed account with personal or business income, this will depend on contribution limits and eligibility. Speak with your financial advisor to see if you qualify for these tax-free or tax-deferred transfers.

Step 3: Complete Transaction
Woohoo — now you can purchase that dreamy vacation property with your self-directed IRA funds! Before making a self-directed transaction for an alternative asset, just be sure to put in your due diligence to ensure the investment decision greatly benefits you. 

Once you instruct the buy, the administrator/trust company will request any necessary documents, send forms for you to complete and sign, review everything, then send out the funds. It’s their job to make sure each transaction follows IRS rules and regulations and your tax advantages are protected. Plus, a good IRA custodian will inform you of ERISA (Employee Retirement Income Security Act) guidelines and ensure you don’t make prohibited transactions that may involve disqualified entities. 

Return on Investment for YOUR Vacation Property

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After investing in vacation rental property, knowing how your self-directed retirement account accepts returns/dividends is very important. As with traditional IRA accounts, your new self-directed account and its holdings (your short-term rental) will hopefully grow in worth and generate a substantial return on investment over time. 

Unlike traditional IRAs, however, your new self-directed account will not reinvest any real estate earnings. Instead, revenue generated from your vacation rental will be paid to the account, where you can leave it “on account” or initiate a new tax-free transfer to a traditional IRA investment.

Short-Term Rental Revenue & Expenses

Generated Revenue
All vacation rental net income is paid to your SDIRA’s administrator/trustee for disposition. Revenue cannot be paid to any other personal or retirement account as all income and expenses for the vacation property must flow through the self-directed IRA. 

Property Expenses
A variety of expenses (some listed below) are deducted from the gross rental income and/or paid by the administrator/trustee on behalf of the IRA holder. If you’re planning to work with a property management company, this would include management commission and fees. Your property manager will be responsible for providing your administrator/trustee with all accounting and charges on a monthly/quarterly/annual basis.

  • Utilities — electric, water, gas, internet, etc.
  • Repairs & updates — furnishings, floors, appliances, etc.
  • Property taxes 
  • Property insurance
  • Liability insurance
  • HOA fees (if applicable)

Property Income Taxes
Typically, you and your new self-directed IRA are free from state and federal income taxes. However, this only applies if all ownership rules are strictly followed, so it’s vital to work closely with your account’s administrator/trustee as well as a qualified tax professional.

Lucrative Vacation Rental Market in North Georgia

Phenomenal views of the Blue Ridge Mountains, lush valleys, lofty trees, or the Toccoa River plus relaxing amenities — including hot tubs, swimming pools, fireplaces, outdoor lounges, game rooms, wet bars, home theaters, and resort extras — North Georgia vacation rentals make great investments. Pair a fantastic condo or cabin rental with an experienced vacation rental management company that takes care of every little detail, and you have the perfect partnership for success without lifting a finger.

At Georgia Cabins for YOU, our financial team, owner representatives, marketing powerhouse, maintenance crews, housekeepers, property inspectors, loyal vendors, and vacation planners all work to surpass YOUR investment goals. And with the confidence to make your vacation rental stand out, stay booked, and reel in revenue, our commission splits are some of the highest in the Blue Ridge market! 

Whether you’re thinking about using your IRA to buy a vacation home, already own a few properties, or just want to chat about investment possibilities, fill out our online inquiry or reach out at 1.800.580.5524 today.