Self-Directed IRA Real Estate Investments – To Insure Or Not To Insure
Self-Directed IRA Real Estate Investments – To Insure Or Not To Insure
Janet Robinson (name changed) had just purchased her first self-directed IRA investment, a small single family home in an up-and-coming Denver neighborhood. When making major decisions, Janet usually wrote a pros and cons list, which in this case was heavy on the pros and light on the cons. One of the cons, one which made her a little nervous, was the unknown and other factors beyond her control – but not the real estate market.
She wouldn’t know her renters very well. “What if they have an accident at home and sue me?” she said. She didn’t know the entire history of the property. “What if there is a problem with the title?” She could control the weather. “What if the 500 year flood is next year?”
Many of the Entrust Group’s clients have real estate assets within their IRA and the subject of insurance on the asset frequently crops up, usually around the time of closing. When your IRA has mortgaged real estate, the lender will always require a hazard insurance policy to insure their interest in the property in the event of a loss. But what about real estate that is not leveraged? We, as administrators, do not require insurance on any property owned by the IRA, nor do we recommend not insuring – it is up to you to make that decision.
What should you know about insuring properties within an IRA? The following should always be considered:
- The IRA must be named as the insured, not you. Many insurance companies are not able to understand this concept. The IRA must have funds to pay for this coverage.
- Most basic policies insure for both hazard and liability. A “trip and fall” accident on the premises could result in your IRA, as the property owner, being sued and therefore at risk for losing the asset.
- Insurance carriers and their requirements vary from state to state. Part of your due diligence when purchasing a property should include both the insurability of the property and the cost to insure.
- Condos and other common interest properties usually have hazard insurance through the Home Owners’ Association. This insurance covers damage to the exterior of the building only. Not covered by this policy are paint, carpeting, window coverings appliances, lost rent or liability. A contents policy would cover most of these items.
Title Insurance: although in a separate category, the most important thing about purchasing a property is a clear title. Your IRA administrator does not require a title policy but if you do have a title policy, again, it is the IRA, not you, that is being insured. Cash deals between individuals who are doing a deal on a “hand shake” frequently do not have title insurance. Keep in mind that the IRA obtaining title to a property does not necessarily mean that it is unencumbered and free of prior claims.
There are no IRS or custodial/administrator requirements for insurance on IRA-owned property. As fiduciary of your IRA, the decision to insure or not is entirely yours. The IRA’s assets face the same threats as an individual owning property, so consider what you need to do to protect your IRA-owned asset. Your insurance agent is the first stop for questions on the different types of insurance coverage available. Title companies are the best source of information on insuring title. Questions on who is the insured and if the IRA’s interest is reflected in the policy may be referred to your Entrust Group representative if there are questions. All policies, whether for hazard or title insurance, may be reviewed by the Entrust Group before closing the deal.
Janet brought the pros and cons list to her Entrust Group representative, who said, “Janet, if you choose, you can buy insurance just like you do with your own home.” This made Janet, and her insurance agent, very happy.
Catherine Wynne is President of Entrust New Direction IRA, Inc, which provides account administration and recordkeeping services for Individual Retirement Arrangements and other plans to clients who want to control their own investment decisions. Entrust New Direction is committed to providing clients and their financial advisors with the best information and quality education. We believe that informed clients will be more likely to recognize and take advantage of investment opportunities available to their self-directed IRAs and other self-directed qualified plans. We provide information not only through our web site, but also through seminars and workshops throughout the West, as well as radio shows, books and CD-ROMs.