If you own a property within a Real Estate IRA, you will naturally want to protect it. After all, even though you don’t own the property directly, if your home should be damaged or destroyed by fire or tornado, or if a tenant falls through a balcony and injures himself and sues the entity that holds your property for damages, you would certainly suffer a loss.
You should consider insuring a Real Estate IRA property just as you would insure your personal residence or any other property not held within a retirement account. Your risk management issues are the same. But there are some important differences you should keep in mind when considering insurance strategies for your Real Estate IRA properties:
First, you should not be using a standard HO-3 homeowner’s insurance policy. You don’t live in the home yourself (IRA rules prohibit you from doing so), and you’re probably renting it out. So the insurance policy you need is a landlord’s insurance policy, not a straight homeowner’s insurance policy. If you are trying to cover your Real Estate IRA property with a homeowner’s insurance policy, and they find out you’ve been renting the property out, they could deny your claim, and leave you holding the bag. Use a properly-designed landlord’s insurance policy, which is structured to cover renters.
Second, you cannot personally be the beneficiary of any insurance property that covers your Real Estate IRA property. Your personal name should not appear anywhere on the insurance policy. You don’t own the property. Your IRA does. So your IRA must be the beneficiary of any insurance policy on your Real Estate IRA-owned property. In addition, if you have a mortgage on the property, you may have to name your mortgage company/IRA lender as an interested party and possibly an additional beneficiary of any insurance policies on your property until your loan is paid off.
Third, you cannot pay insurance premiums yourself. All insurance premiums must be paid by your Real Estate IRA. If you don’t have ‘checkbook control’ and plan to write insurance premium checks yourself from your Real Estate IRA account, contact us today and we’ll show you how to keep up with your insurance and other Real Estate IRA expenses using a self-directed IRA account while still remaining in compliance with applicable laws.
It’s very important not to commingle your personal and IRA funds, or to pay IRA expenses with personal funds and vice versa. Doing so could endanger the tax-advantaged treatment of your entire IRA.
Fourth, you need to buy flood insurance separately, if you want this coverage. Most mortgage companies will require it. Flood damage can be devastating – and is not normally covered by standard landlord insurance policies. If your property is coastal, in an area that is potentially affected by hurricanes, you must also generally buy this coverage separately.
Fifth, consider requiring any renters to own renters insurance. This insures that you will be protected for most tenant-caused damages up to your landlord insurance deductible. Renters insurance also comes with some liability insurance, too, which helps protect your IRA and your IRA’s insurance carrier against claims against your tenant that could pass through to you. For example, if your tenant owns a dog and the dog bites a neighborhood child, your Real Estate IRA a and your tenant could both potentially be named co-defendants in a lawsuit that could amount to tens of thousands of dollars (we’ve seen severe dog bite cases go with judgments and settlements as big as a million and more). If your tenant owns rental insurance, that goes a long way to helping protect your interests as well as those of your tenant.
Sixth, you may want to have an umbrella liability policy that covers not just your rental home in your Real Estate IRA, but everything else in your Real Estate IRA as well.