The Right Insurance for Real Estate Investing
When your self-directed IRA or Solo 401(k) plan owns investment real estate, you of course want to have insurance to protect your plan from risk. The difference between insurance and the right insurance can be significant, however, so making sure the coverage you obtain properly protects your plan for the type of investing you are doing is critical.
Owning properties in a self-directed retirement plan is different than owning in your own name, and comes with some special considerations. Following are some of the things you may want to consider as you shop for insurance initially or as you perform a periodic review of your current coverage.
Insuring the Proper Entity
With a Checkbook IRA or Solo 401(k), it is important to have the plan entity as the named insured. While you have administrative control over the IRA owned LLC or Solo 401(k) trust, you are not the insured party. Be sure your LLC or 401(k) trust is the named insured entity on your policy to guarantee full and proper coverage for your plan.
We have seen many retail, homeowner-focused insurance agents try to provide policies where the client is the named insured and the IRA LLC or 401(k) trust is listed an as additional insured or loss-payee on the policy. This may not provide the full level of coverage required.
Liability Limits
Always carry as much liability protection as you can afford. $1,000,000 per occurrence is widely accepted as a minimum in the industry. As your portfolio grows, so does the amount of coverage you will want to carry. There is a normally a minimal premium charge to double liability protection. A separate umbrella policy for your plan is a method to provide liability coverage beyond the standard $1,000,000 or $2,000,000 limits.
Replacement Cost vs. Actual Cash Value
Hazard loss coverage is generally offered either for replacement cost or actual cost value. The amount you receive in the event of a significant casualty event can vary dramatically depending on the age and condition of the property and other factors. Be sure you understand the potential cost-benefits of each option and choose the method that will best protect your plan in the event of a major loss.
Other Structures and Personal Property Coverages
Be sure that the coverage you obtain provides the full level of protection you need. Some policies will automatically cover additional structures like garages and sheds, but others may not. In addition to insuring the real property, you may also have a need to ensure personal property such as small appliances. Always check with your agent and be sure you understand what is covered and what is not.
Ordinance and Law Coverage
Having Ordinance and Law coverage can provide huge savings in the event you need to rebuild a property after a major casualty. This coverage provides protection for additional costs necessary to bring your damaged property “back to code”, as it is repaired from a loss. Over time, building codes change. Most properties are generally “grand-fathered” to allow for non-compliant issues to remain in place. However, in the event of a major remodel or rebuilding of a property, it will need to be brought up to date to meet current code requirements. Hard-wired smoke detectors, fire sprinklers, and handicapped accessibility are common examples. In a policy without Ordinance and Law endorsement, such additional work is not covered.
Loss-of-rents, or Business Income Coverage
This policy feature provides coverage for your lack of rental income if tenants are forced from the property due to a covered loss. Some policies include such coverage to a certain time limit, such as 12 months. In some cases, loss-of-rents may be a separate endorsement with options to purchase at specific levels of coverage. This is protection all rental property owners should have.
Tenant Occupied vs. Vacant Property
Most landlord policies will provide coverage if a property is tenant occupied, or for a brief period such as 30 days of vacancy between tenants. If a property will be vacant for longer periods of time, such as during a rehab of a newly acquired property, you may need to alter your policy to have valid coverage.
Deductibles
Simply stated, the higher your deductible, the lower your premium. If your plan owns multiple properties, and units are insured under separate policies, the deductible will apply, per location. With a “package” or “blanket” policy, the deductible usually applies per occurrence. This could be a big difference, out-of-pocket, in the event of a local catastrophe such as a tornado, flood or earthquake.
Earthquake, Water Backup, and Flood Coverage, etc.
Certain catastrophic types of losses are not covered by default on most policies. You may need to gain such coverage through endorsements. Make sure you understand what types of special coverage you may or may not have, and how such coverage will apply in the event of a claim. This will ensure you can make an educated decision on whether you should have any or all of these coverages.
Conduct Periodic Insurance Reviews
You should make a habit of meeting with your insurance agent at least annually to ensure your policy provides adequate coverage for your current needs. If you have added several new properties to your portfolio, you may want to increase your liability coverage, for example. If you will be conducting an extensive rehab of a property and it will be vacant for an extended period of time, you will want to adjust to proper coverage.
Work with A Real Estate Investor Focused Insurance Agency
Insurance is a broad field. An office or agent that specializes in insurance programs for real estate investors will be able to provide you with much better guidance as you select and design a policy than someone who’s real focus is homeowner or auto policies. To be sure your policy provides the right kind of coverage for your specific needs, work with an expert familiar with what those needs are.
Thanks to Tim Norris and his team at National Real Estate Insurance Group for guidance on this topic.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
