IRAs enjoy tremendous statutory protection from lawsuits, creditors and bankruptcy. Under federal law, up to about $1.25 million in IRA assets, including Real Estate IRA assets, are exempt from the claims of creditors (though the level of protection, under recent case law, is somewhat less for inherited IRAs than it is for IRAs you built yourself with your own earned income).
That said, while IRAs are usually protected from external creditors, you have to be vigilant about guarding IRAs against threats from within the IRA as well. Owners of rental real estate have to be particularly careful, because the danger of lawsuits or liability are part of the nature of real estate investing: If a tenant is injured or harmed, he or she could possibly sue your IRA, as the owner of the property.
If you own rental property within your real estate IRA, pay careful attention to these tips to protect yourself:
- Use a complete, formal written lease. This protects the tenant against unjust eviction. But it also protects you, as the landlord, because it grants you the right to evict the tenant, if necessary, for things beyond nonpayment of rent. For example, it gives you the right to evict for unauthorized pets, noise violations, property damage or neglect, bedbugs, mold, etc. Absent a lease, you would possibly face a long court battle with the tenant still in your property and possibly causing damage.
- Require renters insurance. If the renter causes damage, the renters’ insurance generally comes with some significant liability insurance protection, depending on the policy and the carrier.
- Background check all tenants, and call their references. It’s okay to charge an application fee to cover your expenses in doing a credit and criminal background check.
- Photo-document the condition of the unit when the tenant moves in, and again at move-out. Keep a written record as well. Inventory appliances, furniture, if any, and absence of holes in the carpet, etc. Have the tenant sign it at move-in, and agree to assume responsibility for any repairs beyond ordinary wear and tear on move-out.
- Charge a security deposit. Some states place limits on how big that deposit may be, so check your state’s laws. Some landlords accept a surety bond in lieu of a security deposit, and that works, too. It requires a much lower outlay from the tenant. If the tenant causes damage, you file a claim with the bond company and they reimburse you all your proven damages, up to the amount of the bond.
- Keep the security deposit in a separate, segregated account, in accordance with the laws in your state. Do not mingle the security deposit with other funds.
- Make any repairs promptly. You need a good reference from the tenant, if you can get one. Some states allow tenants to withhold rent payment if the landlord fails to make certain repairs in a timely manner.
- Get landlord insurance. This provides additional coverage that a standard homeowners insurance policy won’t cover. If you are renting out your dwelling and you only have an ordinary homeowners’ insurance policy on it, and you have a claim, the insurance company might not pay it. You need insurance specific to landlords.
[tweetthis]Federal law-about $1.25 million in IRA assets, including #RealEstateIRA assets, are exempt from creditor claims…[/tweetthis]
American IRA, LLC administers thousands of real estate IRA accounts, as well as other self-directed IRAs, 401(k)s and other retirement accounts. Call us today at 866-7500-IRA(472) for a free, no-obligation consultation, or visit our website and library at www.americanira.com.
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