Buying a fixer-upper at a discount and bringing it up to par to rent or sell is a proven business model, in or out of a Real Estate IRA.
Renovation and construction projects are just part of life for the serious Real Estate IRA owner. Even if you don’t particularly think of yourself as a renovator and you’re just relying on rental income with no ‘pop’ in price from your renovations, sooner or later you’re going to have to replace the roof on that property. In which case you’re going to have contractors crawling all over your house, tearing it up.
That’s a dangerous time for any property owner, and Real Estate IRA owners are no exception. Any time you have construction workers working on property you own, in or out of the Real Estate IRA, you expose yourself to risk and potential liability.
Protecting your Real Estate IRA investment
Here are a few principles to keep in mind to protect your Real Estate IRA:
- Working on it yourself? Don’t do it. You are a prohibited individual and you are not allowed to provide services to your IRA. Doing so can result in penalties and even the disqualification of your IRA. Plus a G.C.’s experience, contacts, leverage with subcontractors and general liability insurance can prove invaluable in seeing the project through to successful completion.
- Does your contractor have a general liability policy in place? Is the policy coverage limit sufficient to cover a total loss to your property and contents? Require your G.C. to show you proof of sufficient coverage.
- You should specify in your contract that the contractor is entirely and solely responsible for workplace safety. You don’t want a worker getting injured on the job (or faking injury because he thinks you have ‘deep pockets’) and then turning around and suing you or your IRA. Verify workers compensation insurance is in place and require your G.C. to show you proof of that coverage.
- What happens if a contractor walks off the job or goes bankrupt on the project and fails to pay a subcontractor? In that event, the subcontractor can and usually will file a contractor’s lien, encumbering the property until they are paid. The homeowner is ultimately responsible for payment. To prevent this possibility, you may want to have the general contractor post a ‘completion bond.’ Another alternative is to have the G.C. place payments in escrow ahead of time. In exchange, subcontractors can sign a document releasing you from liability for nonpayment.
- Never lend tools, equipment or supplies to contractors or subcontractors working on the house. If you do, you possibly expose yourself to a lawsuit arising from injuries due to defective equipment that you provided. Also, if the IRS gets word that you or your contractors were installing your own personal supplies into the property, you could risk triggering the dis-allowance of the IRA, incurring needless taxes and penalties.
- Remember that you don’t have unlimited liquidity within an IRA. If your IRA needs to raise cash to pay for a renovation, you can’t contribute more than $5,500 in any given year.
- Use licensed and bonded contractors. Period. Cheating exposes you to substantial liability and fines. If someone gets hurt on the job, lawyers could empty out your IRA.
For more information on Real Estate IRA investing in general, please don’t hesitate to contact American IRA, LLC. American IRA is America’s leading expert third party administrator for Self-Directed IRAs, 401(k)s, SEP IRAs, SIMPLE IRAs. We specialize in educating our clients about IRS rules concerning Real Estate IRAs, precious metals IRAs, and other nontraditional IRA investment strategies, as well as ensuring transactions are carried out swiftly and accurately. Visit our website at www.americanira.com, or call us today at 866-7500-IRA(472).
We look forward to serving you.
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