Insuring Your Investment
By Alisha Bennett
Buying property as an investment is one of the most popular reasons that clients seek out the Check Book IRA. The fact that you can even retire in a home originally purchased as an IRA investment is an exciting prospect (https://www.checkbookira.com/retire-home-purchased-ira/).
However, after all of the effort in creating a self-managed retirement plan and finding the perfect property, too many times the proper insurance procedures are overlooked. Insuring property owned by an IRA-LLC is a different process; read the article below to make sure your hard-earned investment isn’t at risk of being improperly insured:
How to Insure a Real Estate IRA Property
Owning a real estate property within a Real Estate IRA is not only a great way to build wealth, but it can be a tremendous boon to an investor’s retirement nest egg. Jim Hitt of American IRA recently took to the American IRA blog to explain how investors can further protect this nest egg by insuring their Real Estate IRA property in the proper manner.
According to Jim Hitt, investors should consider insuring their Real Estate IRA property as they would their own home—the difference is in the way an investor might go about it. Like any property, an investor wants some assurance that they’ll have what they need for long-term protection, which in turn boosts the feeling of financial security.
But Jim Hitt also explains that there are certain rules and regulations that Real Estate IRA investors will need to comply with to avoid taxes and penalties.
“First,” said Jim Hitt in the blog, “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.”
This demonstrate a critical difference between holding property in an IRA and not in a general way—investors have to separate themselves from the IRA to a large degree.
Jim Hitt also made the point that the insurance policy should not personally benefit the investor as the beneficiary—the account itself should be the beneficiary of the insurance policy.
Insurance premiums, too, will be separated from investors’ usual finances and will be paid by the IRA itself. Jim Hitt explains that a Self-Directed IRA administration firm like American IRA can be contacted to figure out how to make the logistics of such a transaction take place.
“With this article, I wanted to show people what it’s like to protect yourself with a Real Estate IRA,” said Jim Hitt. “Many people don’t know just how separate you have to be from the real estate within your retirement account. But if you do it right and work with a reputable Self-Directed IRA administration firm, the paperwork becomes much easier to handle.”
Why would you buy a real estate investment property inside your IRA or Ind 401(K) accounts and loose the benefit of depreciation? That is one of the most beautiful benefits of holding real estate property. Financing it would alse be problematic as there are very limited avenues to getting loans against properties held in your IRA.
I think that a bit of an oversimplified view. Its true that you lose deductions when buying property in a retirement account, but people tend to forget about depreciation recapture, and when you work the numbers on funds that remain untaxed such as tax-deferred IRA or Solo 401(k) funds, there’s no question that those retirement funds will grow exponentially faster than personal funds that are taxed; even when those personal funds are invested in real estate for which you get certain deductions.
If you think through it a bit more, you’ll see that losing deductions on property is really a non-issue here. Of course the best thing to do is get a Roth 401(k) or Roth IRA built up, so that you don’t have to bother with the taxes at all.