Many of our rollover clients have used their self-directed IRAs to invest in so-called “vacation properties,” renting out scenic beach-front or mountaintop homes for short or extended periods as a way to generate income.

The law is very clear that you can NOT use these properties for your own enjoyment if they have been bought with IRA funds. Not only are you and all other disqualified persons prohibited from using them as vacation or temporary accommodations prior to distribution, you and disqualified persons also cannot perform certain tasks yourself, such as minor repairs or landscaping, for instance. Costs for maintenance, insurance and taxes also must come from your self-directed IRA funds.

Many other people buy a second home through other means, and a new Internal Revenue Service tax video provides some answers about when you must report that income and expense, and when it may not be required.

What Are the Rules on Taxes and Vacation Homes?

Special rules apply to those situations, which you can find addressed in IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes).

Briefly:

• If you rent out that property for fewer than 15 days per year, you may not have to report that income at all, meaning it is tax-free.
• Those who rent out their properties for more than 15 days per year are subject to the sometimes-confusing and complex IRS rules regarding deductions, expenses and how to report them.

In addition to referencing IRS Publication 527, we always urge you to seek the guidance of your trusted tax, financial or legal adviser.

For more information, see the IRS website, which is absolutely overflowing with information.