Cashing out a $1M IRA early to buy an Airbnb?

[Dicey]

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]

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]

Taxing authorities have more guts than local planning departments and city councils.  If they see money, they will go after it.

[ender]

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]

@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]

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]

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.

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]

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,