STR Arbitrage and UBTI

[Mark Davidson]

I'm struggling a bit with the type of investing allowed within my solo 401k plan.  My concern is triggering UBTI or having the IRS frown on the nature of my investment.

About a year ago, I purchased an investment single family home using plan proceeds.  

I had planned to rent it out as a short term rental and even fully furnished it.  I then found out that this type of use within a solo 401k may or may not be allowed by the IRS so I did a typical one year residential annual lease.  

The tenants have moved out, and suprise, they actually took great care of it.  However, I know I'm pushing my luck and would rather rent it to someone who will arbitrage it and has an interest in keeping the place in top condition. 

I would like to sign a one year lease with a property manager (no family relation to me) who plans to rent it out short or long term on Airbnb, VRBO, or whatever he chooses. It is possible that the average stay may average less than 7 days, I don’t know, nor would I have control over that.  

The arbitrage investor would be the tenant and I would still be the property manager, which just means I would hire out any repair work and pay the property tax and insurance on the structure.

The way I would set up the lease is that I have nothing to do with his rental use other than entering into the annual lease with him.  There would be an addendum to the lease to specify the inventory of furniture included.

Although it is furnished, down to the utensils, I would not pay utilities, approve guests, provide coffee, snacks, or any other goods or services to him or his guests. The tenant would also be responsible for basic maintenance, all cleaning, advertising, scheduling, and lawn maintenance. I would not be responsible for any management fees with him or with airbnb, nor would I be responsible for local lodging taxes. In other words, it's just a plain old residential annual lease with his LLC.

I understand a triple net lease is probably fine with the IRS.  This is not a triple net lease since I’m responsible, for instance, for the property taxes, insurance, and substantial repairs.  It seems the IRS would not have a problem with this arrangement. The rent is even the same amount I received from the prior tenants.

I'd appreciate any thoughts.