Investing in Short-Term Rentals With an IRA: What You Need to Know

How It Works: Buying an Airbnb/VRBO in an SDIRA

Purchasing a short-term rental through a self-directed IRA follows a structured process to ensure compliance with IRS regulations. Here’s how it works.

Step 1: Open and fund a self-directed IRA

To invest in STRs, you must first establish an IRA with a custodian that allows real estate investments, such as Equity Trust Company. You can fund your self-directed IRA through rollovers, transfers, or new contributions.

Step 2: Identify a short-term rental property

Choose a property in a desirable location with strong short-term rental demand. Popular areas include vacation hot spots, urban centers, and event-driven locations.

Step 3: Purchase the property through the SDIRA

The IRA—not you personally—must be the buyer of the property. All purchase transactions must be completed using IRA funds, and the property title must reflect IRA ownership.

Step 4: Hire a third-party property manager

IRS rules prohibit self-dealing, meaning you cannot personally manage or perform maintenance on the property. A qualified third-party property management company must handle bookings, maintenance, and other operational tasks.

Step 5: Ensure all expenses and income flow through the IRA

All property-related expenses (maintenance, taxes, repairs, insurance) must be paid using IRA funds. Likewise, all rental income must go back into the IRA, maintaining tax-deferred or tax-free growth.

Key Considerations & IRS Rules

While investing in STRs through a self-directed IRA has potential advantages, there are essential rules and tax considerations to be aware of.

1. No personal use of the property

IRS regulations prohibit IRA owners and their immediate family members from staying in or personally benefiting from an IRA-owned property. Any personal use of the STR will be considered a prohibited transaction, potentially disqualifying the IRA and triggering taxes and penalties.

2. Expenses must be paid from the IRA

You cannot personally cover maintenance, repairs, or management fees for an IRA-owned property. All expenses must be paid directly from the IRA’s funds to maintain compliance.

3. Unrelated Business Income Tax (UBIT) considerations

If the SDIRA-financed property uses a non-recourse loan, rental income may be subject to Unrelated Business Income Tax (UBIT). This tax applies when IRA investments generate income through leveraged financing, potentially reducing overall returns. Investors should consult a tax professional to understand UBIT implications.

4. Research short-term rental regulations

Some cities and HOAs have strict rules regarding STRs, including permit requirements, rental restrictions, and taxation policies. Always check local regulations before purchasing a property to ensure compliance.

Learn More About Real Estate in an IRA

Investing in short-term rentals through an SDIRA can provide benefits, including tax advantages. However, it’s crucial to understand the IRS rules and regulations to avoid penalties and maximize returns. Working with a custodian with extensive experience in self-directed real estate investing, like Equity Trust, can make the process much smoother. 

If you’re ready to explore how STRs fit into your retirement strategy, connect with an Equity Trust IRA Counselor today.

Equity Trust Company is a directed custodian and does not provide tax, legal, or investment advice. Any information communicated by Equity Trust is for educational purposes only, and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.

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