The two recent devastating storms to strike the Southern United States, Hurricanes Irma and Harvey, have focused attention on the importance of maintaining insurance coverage on residential properties, to include Real Estate IRA-owned properties.
Real Estate IRA enthusiasts should understand the types of coverage available, what each does and does not cover, and how deductibles work.
First, remember that standard home insurance coverage does not generally protect against damages from hurricane winds in hurricane-prone areas. Contact us today to add windstorm insurance as a rider on your standard homeowner’s insurance policy.
Windstorm insurance provides protection not just against hurricanes, but also against cyclones, tornadoes and tropical storms, as well. However, neither hurricane insurance nor your standard homeowners’ insurance policy will cover you against groundwater floods and seepage. For that you will need flood insurance, generally through the National Flood Insurance Program.
Note: Don’t wait until there is a storm approaching the coast to buy coverage. Insurance companies will not let new policies go active while there is an actual storm threatening the coast.
19 states and the District of Columbia impose deductibles on hurricane insurance policy holders. This section applies to Real Estate IRA owners in Alabama, Connecticut, Delaware, Florida, Georgia, Louisiana, Maine, Maryland, Mississippi, Massachusetts, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Texas and Virginia, as well as the nation’s capital.
Deductibles for residential IRA properties typically run between 1 percent and 5 percent of the insured value of the property. In some coastal areas, deductibles can run higher than in inland areas. Specific deductible rules vary by state, however. For a full state-by-state breakdown of deductible rules, see here.
There are two basic deductible types for wind damage: Hurricane deductibles and windstorm or wind/hail deductibles. The first apply only to hurricanes, wind/hail deductibles are applicable to any kind of wind damage.
For Real Estate IRA properties, both deductibles must be paid out of Real Estate IRA funds. If you pay deductibles or pay contractors directly out of your own personal funds, you will run afoul of prohibited transaction rules and risk substantial penalties and taxes.
Replacement costs vs. actual cash value
If you have a replacement cost policy, your carrier will pay what it costs to rebuild a substantially similar property on that site – subject to the policy maximum and minus your deductible. An actual cash value policy will also subtract depreciation from the final settlement check. The longer you have owned property that has been damaged or destroyed by a covered peril, the smaller your check will be, since the property will have depreciated substantially since you bought it. Many homeowners and Real Estate IRA owners have been disappointed by low settlement offers because they failed to understand how these policies work.
Actual cash value policies typically come with much lower premiums than replacement value policies. But Real Estate IRA investors who purchase actual cash value policies should try to dedicate their premium savings toward replacing roofs and other critical components of your home. Remember, Real Estate IRA properties don’t generate any tax benefits for depreciation, but you’ll have to save the money internally within the Real Estate IRA to avoid leaving yourself underinsured.
Be sure to set up your insurance policies correctly. The owner and beneficiary of your IRA should be listed as the IRA itself, and not you, personally. Otherwise you could violate prohibited transaction rules, again generating unwanted fees and taxes.