July 7, 2023

Invest in a Vacation Rental with a Self-Directed IRA

Written By: Daniel Gleich

Key Points 

  • Buying a vacation rental with retirement funds is possible through a Self-Directed IRA (SDIRA).

  • Prohibited transactions and UBIT are among several rules to know when investing in a vacation rental with self-directed retirement funds.

  • Choosing a reliable and knowledgeable Self-Directed IRA custodian like Madison Trust can improve your investment experience.

49% of consumers plan to travel more in 2023, according to a Forbes Advisor survey. This spike in travel could be an opportunity to invest in a vacation rental within a tax-advantaged retirement account, such as a Self-Directed IRA (SDIRA).

Vacation rental property with a pool, palm trees, and ocean in the background to show that a Self-Directed IRA can invest in a vacation rental.

Whether you are looking to invest in a secluded cabin in the mountains or a beachfront condo – you may be surprised to learn it’s easy to invest in a vacation rental with your self-directed retirement plan.

Real Estate Investing in a Self-Directed IRA

Real estate is one of the most popular investments among self-directed account holders. There is a wide variety of land that may be invested in such as commercial properties, raw land, residential properties, and rental properties.

Self-Directed IRA investor on computer with increasing trend graph and small houses next to him, to show that his investment is growing in a tax-advantaged retirement account.

Real estate has the potential to be lucrative. You can hold the property for appreciation and receive a steady stream of income, which can lead to higher returns in the long run. Plus, the income you earn can be tax-deferred (Self-Directed Traditional IRA) or tax-free (Self-Directed Roth IRA).

Another potential benefit of including real estate in your self-directed retirement portfolio is that you are diversifying your portfolio with a tangible asset.

Short-Term Self-Directed IRA Vacation Rental Property Rules to Know

Expenses are Paid Only with Self-Directed IRA Funds

To remain IRS-compliant, all expenses related to your vacation rental investment must be paid with funds from your Self-Directed IRA. Possible expenses include management and leasing fees, utilities, maintenance costs, property taxes, and HOA fees, among other property fees.

Self-Directed IRA investor looking at his finances/expenses he owes on his vacation rental investment property.

Rental Income Stays in the Self-Directed IRA

All income generated through the vacation rental investment, such as rental income, must be paid directly to the Self-Directed IRA.

Title the Property in the Name of the Self-Directed IRA

To invest in real estate with retirement funds, the property must be owned by the Self-Directed IRA, not you personally. So, the titling is in the name of the IRA. If you choose Madison Trust as your Self-Directed IRA custodian, your vacation rental would be titled as “Madison Trust Company Custodian FBO [Your Name] [Your MTC Account Number]”.

Prohibited Transactions (Disqualified Persons)

When you invest with a Self-Directed IRA, your Self-Directed IRA benefits from the investment, not you personally.    

In addition to the account holder, certain family members are not allowed to receive benefits from your IRA’s investment. Disqualified persons include:

  • You (the SDIRA account holder)
  • Parents
  • Grandparents
  • Spouse
  • Children
  • Children's Spouses
  • Grandchildren
  • Grandchildren's Spouses

In terms of a Self-Directed IRA vacation rental, disqualified persons are not allowed to:

  • Live on, rent, or use the property
  • Lease the property for any business you own
  • Personally conduct repairs on the property  
  • Hire the business you own to do repairs 
  • Personally guarantee the loan, if financing the property (the loan must be a non-recourse loan

To learn more about prohibited transactions and disqualified persons, watch our latest webinar!


UBIT, or Unrelated Business Income Tax, is a tax that applies to the profits generated from an active business that is not related to the primary purpose of a tax-exempt account. If your vacation rental is a short-term rental, UBIT may apply in the following scenario:  

  • If the rental is shorter than 7 days, the investment may be considered active. Consult with a tax specialist for guidance.

UDFI, or Unrelated Debt Financed Income, may apply to investment income generated from a financed rental property held by a Self-Directed IRA. Please keep in mind that when an IRA uses leverage to purchase an investment, the loan must be a non-recourse loan. Visit our recent blog to learn how to invest in real estate with a non-recourse loan.

Although your investment may be subject to UBIT and UDFI, this should not deter you from investing in alternative assets. The potential growth of the investment typically outweighs the taxes.

Tips for Investing in a Vacation Rental with a Self-Directed IRA

Tips for Investing in a Vacation Rental with a Self-Directed IRA Infographic: (1) Choose a Reliable & Knowledgeable Self-Directed IRA Custodian - Madison Trust's knowledgeable and friendly Self-Directed IRA Specialists are here to answer your questions and ensure your account remains IRS-compliant. (2) Conduct Due Diligence - Research the local real estate market, the popularity of the vacation spot, and how seasonality may affect your income stream. Also, become familiar with Self-Directed IRAs, the IRS's rules, and potential risks. (3) Confirm It's a Long-Term Investment - Like most retirement accounts, Self-Directed IRAs are typically meant for long-term investing. Watch your investment property appreciate over time. (3) Consider Checkbook Control - A type of Self-Directed IRA, called a Checkbook IRA, allows investors to make transactions by simply writing a check or sending a wire. This way, account holders can receive income/pay expenses in real time.

Steps to Invest in a Vacation Rental with a Self-Directed IRA

Icon of an application with a checklist and pen to signify opening a Self-Directed IRA.

1. Open your account with Madison Trust by completing our easy online application.

Icon of a stack of coins to signify funding a self-directed account.

2. Fund your account by transferring or rolling over all - or a portion of - your IRA or 401(k), or by making an initial contribution.

Icon of an increasing trend graph to signify making an investment in an alternative asset.

3. Place an investment by instructing Madison Trust to send your IRA funds directly to your investment by writing a check or sending a wire. 

Conclusion: Let's Tie It All Up

If you are wondering if you can use a Self-Directed IRA to buy an investment property, like an Airbnb or vacation rental, the answer is yes! A vacation rental may be a great opportunity for you to grow your retirement savings and diversify your portfolio into alternative assets. Schedule a free discovery call with a Self-Directed IRA Specialist to learn more about investing in a vacation rental. 

Small model house on a table next to keys and Self-Directed IRA real estate investors in the back signing documents.

Disclaimer: All of the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax or investment advice. Nothing of the foregoing, or of any other written, electronic, or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relayed as, legal, tax, investment advice, statements, opinions, or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.

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