14 Tips for Vacation Rental Property Investments in Your IRA

14 Tips for Vacation Rental Property Investments In Your IRA

Rental property is a common asset investors use to make income. Vacation rental property investments have the potential to garner a continuous, tidy monthly sum—if the property is located in a popular locale and is rented out often.

These assets are favored by clients of Midland Trust, as self-directed retirement plan funds can be used to invest in many diverse real estate assets to build tax-sheltered income.

Because we often work with clients who use vacation rental property investments in their self-directed IRAs, we’ve been able to compile a handy list of things to consider and understand about these transactions. If self-directed accounts are not maintained in compliance with IRS rules and regulations, your plan can incur penalties, taxation, and even disqualification of its intended tax-sheltered status.

These assets are not transactions to take on unless you fully understand the benefits and risks. You need to be familiar with the way income and expenses are deposited and paid for, as well as how the property must be maintained and used as an investment in your IRA.

Here’s what you need to know about vacation rental investment property.

  • Your IRA is the property owner and all income flows directly into that account.
  • Expenses must be paid with IRA funds. You are not allowed to personally pay any expenses or personally receive any rental payments.
  • No personal use of the property owned by your IRA is allowed—not even for a 2-week vacation.
  • If you plan to purchase a condo or property in a community development, make sure rentals are allowed, as some associations do not permit the leasing of condos/homes in this manner.
  • When purchasing a vacation rental, figure the frequency of the rental period in order to cover expenses and turn a profit.
  • Allow for advertising expenses to advertise the property. These are expenses that your IRA must incur.
  • Factor in maintenance costs and repairs into your IRA’s budget. Include cleaning costs after each guest leaves if you don’t include that cost in your rental agreement.
  • If HOA dues are applicable, count on them to rise in the future and add that to your budget.
  • When setting the rent, consider what rates guests could rent property for elsewhere. The more competitive your rates, the better your ability of keeping it rented out!
  • Consider using a property manager, especially if the property is not local.
  • Insurance requirements may be different for vacation properties. Check with an insurance agent to cover your bases.
  • Taxes may be due if it is a vacation rental/resort property. Check with the State Department of Revenue or Business Licensing Division to find out. Again, this would be an expense to be paid by the IRA.
  • Know the association or condo rules for the property, if any, and make sure any renters are aware of them, too.
  • Consider installing a security system if the property will remain vacant for periods of time.

These tips are just a few of the details you need to know when investing with an IRA. They should be enough to get you started on the right path of understanding how these assets work when purchased using retirement funds. A good investment has the potential to considerably grow wealth in your portfolio.

If you want to learn more about vacation rental property investments or other real estate-related assets permissible in self-directed retirement plans, contact Midland Trust today at (239) 333-1032!