Author Topic: Cashing out a $1M IRA early to buy an Airbnb?  (Read 4097 times)

FatFI2025

  • Stubble
  • **
  • Posts: 175
  • Location: California
Re: Cashing out a $1M IRA early to buy an Airbnb?
« Reply #50 on: July 10, 2019, 07:58:06 AM »
What amazes me about this thread is that someone can be smart enough to amass $1M in a IRA and then dumb enough to consider cashing it in and paying 50% in tax.   Sorry to be blunt.  Don't mess with your IRA.

It's one thing I've observed that's not often discussed. In the workplace if you're bold, confident, and optimistic -- dismissing the naysayers and past failures -- you tend to get promoted and make more money. If you're an entrepreneur these are critical characteristics. Chasing trends in business really does work. Cyber! AI! Blockchain! Green energy!

But the inverse is true for markets and tax authorities. Fortune does not favor the bold. I've talked to dozens of highly successful businessmen who are awful investors for this reason. They can't turn it off so they end up losing a good portion of those high earnings.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1488
  • Age: 59
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Cashing out a $1M IRA early to buy an Airbnb?
« Reply #51 on: July 10, 2019, 01:11:21 PM »

A note: That recent study, "Rate of Return of Everything," which I've been talking up in other threads says our portfolios will probably all do better with an allocation to housing. Most people can't swing that. You can. BTW, the 100 year returns for the Netherlands, one of the country's described in the study, show the usual case: Housing beats equities:






I may have missed something, but I'm confused by your use of the Netherlands rather than the United States here. In the US, equities handily beat housing in returns in all periods since 1919 per your graphs.

I'm not sure we disagree here. Probably we're not understanding each other.

I'm just trying to show a variety of the line charts. Because it seems like there are lots of actionable insights in data.

E.g., one thing that I see as relevant is for most countries, housing did better than equities. Also for most countries, housing showed less variability. BTW, if someone wants to think that US will continue to be the exceptional case of a country where equities outperform housing, that's okay.

Another thing that I think is interesting even if you want to believe that US equities beat non-US equities and that US equities beat US housing... How housing impacts a portfolio's performance. It looks to me if a decent sized allocation to housing would have meant the 1966 scenario doesn't cause a portfolio to fail.



SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1488
  • Age: 59
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Cashing out a $1M IRA early to buy an Airbnb?
« Reply #52 on: July 10, 2019, 01:14:59 PM »
@Nochka , have you ever heard that when you've lost a loved one, you should avoid making big decisions as much as possible for a year? When you're grieving, you don't think very well, and can essentially be temporarily insane.

I think you're grieving. Don't make any big decisions for at least 6 months.

I totally disagree with this advice. Sorry. To put it under a spotlight, if someone losing a job causes a mourning period and grief, are you suggesting that person not begin to look for a replacement job for 6 months?

Also, seems like the real question here is whether it's okay for people to invest some chunk of their portfolio into real estate? Or a small business? Those sorts of choices aren't right ones for everyone. But they are great choices for some people.

Bobberth

  • Bristles
  • ***
  • Posts: 311
Re: Cashing out a $1M IRA early to buy an Airbnb?
« Reply #53 on: July 10, 2019, 04:11:18 PM »
The Assessor for the City of St. Louis just recharacterized properties listed on Air BnB and the other sites as commercial properties instead of residential. No law was passed. No tax rates were raised.  All it took was for them to change their mind on the use of the property and the valuation rate went from 19% residential to 32% commercial. A 68% increase in value the taxes are based on due to this recharacterization. I think they sent out the reassessments and then announced what they did after researching on the various websites. Zero public input until the outcry afterwards. There are going to be appeals but the Assessor said they collected a bunch of data from the different sites and had a threshold to meet before they recharacterized as commercial. Going to be hard to appeal in my non-professional eyes. I doubt that St. Louis was the first municipality to do this but I guarantee they won't be the last considering how easy this "tax increase" was.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 11095
  • Age: 61
  • Location: NorCal
Re: Cashing out a $1M IRA early to buy an Airbnb?
« Reply #54 on: July 11, 2019, 12:50:10 AM »
The Assessor for the City of St. Louis just recharacterized properties listed on Air BnB and the other sites as commercial properties instead of residential. No law was passed. No tax rates were raised.  All it took was for them to change their mind on the use of the property and the valuation rate went from 19% residential to 32% commercial. A 68% increase in value the taxes are based on due to this recharacterization. I think they sent out the reassessments and then announced what they did after researching on the various websites. Zero public input until the outcry afterwards. There are going to be appeals but the Assessor said they collected a bunch of data from the different sites and had a threshold to meet before they recharacterized as commercial. Going to be hard to appeal in my non-professional eyes. I doubt that St. Louis was the first municipality to do this but I guarantee they won't be the last considering how easy this "tax increase" was.
Wow! That was s pretty slick move.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3364
Re: Cashing out a $1M IRA early to buy an Airbnb?
« Reply #55 on: July 11, 2019, 08:33:10 AM »
To be fair, an AirBnB is a hotel. A tiny hotel, but a hotel. If hotels are taxed at commercial rates, well...

-W

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5104
Re: Cashing out a $1M IRA early to buy an Airbnb?
« Reply #56 on: July 11, 2019, 09:56:28 AM »
Taxing authorities have more guts than local planning departments and city councils.  If they see money, they will go after it.

ender

  • Magnum Stache
  • ******
  • Posts: 4942
Re: Cashing out a $1M IRA early to buy an Airbnb?
« Reply #57 on: July 13, 2019, 12:38:58 PM »
To be fair, an AirBnB is a hotel. A tiny hotel, but a hotel. If hotels are taxed at commercial rates, well...

-W

It's kind of the same problem that Uber/Lyft have. You can't functionally be an entity without being considered that entity.

Sibley

  • Magnum Stache
  • ******
  • Posts: 3703
  • Location: Chicago, IL
Re: Cashing out a $1M IRA early to buy an Airbnb?
« Reply #58 on: July 14, 2019, 04:04:37 PM »
@Nochka , have you ever heard that when you've lost a loved one, you should avoid making big decisions as much as possible for a year? When you're grieving, you don't think very well, and can essentially be temporarily insane.

I think you're grieving. Don't make any big decisions for at least 6 months.

I totally disagree with this advice. Sorry. To put it under a spotlight, if someone losing a job causes a mourning period and grief, are you suggesting that person not begin to look for a replacement job for 6 months?

Also, seems like the real question here is whether it's okay for people to invest some chunk of their portfolio into real estate? Or a small business? Those sorts of choices aren't right ones for everyone. But they are great choices for some people.

Feel free to disagree, but OP is considering cashing out $1M IRA and paying 40% of it in taxes. They stated they don't want to return to work and are trying to figure out how to accomplish that goal. So maybe it's not grief, but desperation may fit the bill. Or midlife crisis. Or whatever, but seriously, this is nuts.

I'm not saying that RE investments don't make sense, but the circumstances here are more of a gamble, and OP's family would probably prefer not to be plunged into financial difficulties if this all goes bad. At the very least, put the brakes on and let the dust settle for a month or two.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1488
  • Age: 59
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Cashing out a $1M IRA early to buy an Airbnb?
« Reply #59 on: July 17, 2019, 08:04:10 AM »
Feel free to disagree, but OP is considering cashing out $1M IRA and paying 40% of it in taxes.

Well, just to be clear, not the only reason but a big part of the reason that I thought the idea was worth considering is that above statement is wrong.

He thought that was case... but as I explained he should only need to take half of the $1M because he won't pay income taxes if the deal is done right.

This leaves him with $500K still in the IRA... and as noted in OP, apparently he has another $1M in a trust fund that'll become his at some point.

Xlar

  • Stubble
  • **
  • Posts: 195
Re: Cashing out a $1M IRA early to buy an Airbnb?
« Reply #60 on: July 23, 2019, 05:09:31 PM »
No no no, cashing in the IRA is a terrible idea.

We continue to look at expenses closely, and I have no desire to leave the corporate world only to work part-time.
Yet you're talking about paying to buy a part time job.
Quote
We're generating $100K and the only significant expenses after the mortgage are $20K in cleanings, insurance and property taxes. So call it $80K net, or 10% on the $800K before appreciation.

Zero in income taxes, zero in maintenance? An $800k house with hundreds of people going through it does not have a $0 maintenance bill. A typical single family home, which would have much lower wear and tear than an AirBnB home, is estimated at about 1% of home value in maintenance, so $8000. Income taxes are going to be significant.

Work on your expenses.

I am also concerned that you are missing significant expenses. All the airbnb's that I've seen are furnished. What's your yearly expense replacing furniture in an 800k house? I would expect an 800k house means that it is big which means lots of furniture and that since it is in an expensive area people expect it to be high quality and in good condition?

A Fella from Stella

  • Pencil Stache
  • ****
  • Posts: 525
Re: Cashing out a $1M IRA early to buy an Airbnb?
« Reply #61 on: July 31, 2019, 09:01:41 AM »
Please do not turn your liquid life savings meant for long-term payments in old age into half its value overnight in something that may be harder to convert to money.

However, do consider business ideas like this one.

The thing is, you only have a little over $1,000,000, and you're not looking to go full mustache, which is what you need to do to live off that amount,