Self-Directed IRA to purchase Short Term Rental with Arbitrage

[Robert Karnes]

Hi All,

I am looking at making a purchase of a vacation rental with my SDIRA. I have had long term rentals held this way and I am pretty familiar with the basic rules related to performing work, UBIT, etc.

To set it up a little.

Mountain property 30 minutes from a ski area and also a summer vacation area.

The property is off grid but uses a generator for power. I might install a solar setup to provide lights, etc. to avoid generator use except as backup.
AirDNA says about $90k per year.

For those unfamiliar Unrelated Business Income Tax (UBIT) SDIRAs (And other non-profits) get hit when they engage in business activity. Long-term real estate is specifically excluded but STR is trickier. UBIT can hit 37%. Ouch.

I want to avoid that.

I also can't actively work at or on the property as a prohibited person. Doing so could cause the IRA to be considered distributed and incurred lots of taxes and penalties.

I want to avoid that.

I am thinking about deliberately setting up an arbitrage situation where I rent the real estate for 40% of the AirDNA revenue with a 10% of sales kicker to an experienced 5-star STR host. I would cover taxes and capital improvement. The tenant (Host) would be responsible utilities, insurance, repairs, etc.

I think, because I would be engaging in a long term rental this would avoid UBIT and because I would have no direct involvement in the STR piece I would avoid any prohibited transactions.

Yes I would be giving up a fair amount of revenue but avoiding 37% UBIT is worth roughly 37% of profit. And the tenant host would be paying taxes just as they do with any other arbitrage.

My question(s)

1. Anybody have direct experience with this situation? See any flaws in this approach?

2. Is there anybody currently doing arbitrage that would find this appealing?

I do have about a dozen long-term rentals and 3 STRs.

Thanks,

Robert

[John Underwood]

UBIT is generally mandated when you borrow money for a self directed IRA asset. Solo 401k's are exempt from UBIT, if you can qualify (google this) it is a much better retirement vehicle. 

I own 5 properties (LTR's in myself directed IRA and one so far in my Solo 401k. My IRA is buying another property for 50k next week. Both are ROTH's so I will never pay tax on the gains or incoming rents.

You sound like you already know the rules, but you can't ever use the property for you or your parents or kids as long as it is held in your IRA. You also never do any sweat equity work on the property.

One day when you retire, and your IRA does a distribution of the property from the IRA you can then use it as you wish.