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Tax-deductible homeowners insurance

Is Home Insurance Tax-Deductible?

Your home insurance is not tax deductible if your home is used solely for your personal residence. According to the Internal Revenue Service (IRS), your home insurance premiums are nondeductible expenses. Any payments for insurance, including comprehensive and fire coverage, can’t be itemized as deductions on your tax return. However, there are some cases when a portion or all of your home insurance premium can be tax-deductible. For example, if a part of your home is used in business, like a home office, you might be able to declare part of your insurance premium as an expense to lower your taxable income.

Cases When Homeowners Insurance Can Be Tax-Deductible

There are some instances or exceptions that can make your homeowners insurance tax-deductible. You can deduct it if:

1. There’s a business running in your home

You may be able to deduct a portion of your homeowners insurance cost from your gross income if your work or running a business out of your home. Deductions will be based on the square footage of your workspace inside your house. For instance, if your workspace is 15% of your home’s square footage, then the number of premiums you are paying each year will have a 15% reduction in your taxable income.

However, if it’s a den or other area that serves as a temporary office, deductions cannot be applied. Each room with a desk in it isn’t considered as a home office. It must first be covered under a person’s home insurance policy and should qualify for a home office in order to write off any part of their premiums. As long as the area is solely devoted to operating a business, any office, whether it’s a garage or a free-standing structure, it can qualify for the write-off. Make sure your deductions are within legal guidelines by getting help from your financial advisor or your accountant.

2. You are receiving rental income

If you’re a landlord and tenants are renting on your home, your homeowners insurance can be deducted from your taxes. Renting out a home is a business and the income you’re generating each month is taxable, therefore the money you spend on a rental house is considered as business expenses, even if it’s homeowners insurance expense.

The portion of homeowners insurance premium deductible for tax depends on the rental property. If a tenant is renting in the basement of your home, you can only write-off a part of your home insurance premium since it covers more than the rental property. If you have a whole house for rent that isn’t connected to the home you where you live, you can write-off 100% of the home insurance premium that covers a rental unit.

Insurance policies affiliated with your rental business can also be written off, such as an umbrella policy to expand your liability coverage. When you have a couple of properties used to generate profit, then their homeowner’s insurance is all deductible from tax.

3. You have filed claims for theft or casualty loss

Casualty losses or theft victims can also have a tax deduction when they receive insurance payments that don’t cover an entire loss. If reimbursement or a home insurance payment has been received and it’s less than your property’s value when it’s destroyed, stolen, or damaged, the difference can be deducted from your taxes. On the other hand, you may have to report a taxable gain of the insurance payment for a loss exceeds the property’s current value.

However, starting from the 2018 tax year, the rules have changed. The losses due to personal theft or casualty are not deductible, whether it’s covered by your insurance policy. The only exception is the loss occurred in a federally-declared, tax-eligible area that was directly caused by a disaster. If you file an insurance claim for a financial loss due to a federally-declared disaster, the amount of the claim settlement on your tax return cannot be written off. However, if you’re reimbursed partially by your insurer, the remaining value of the property can be written off from your income as a loss.

Here are some examples of deductible casualty losses:

  • Sonic booms
  • Mine cave-ins
  • Hurricanes and tornadoes
  • Earthquakes
  • Flood
  • Unintentional fire
  • Relocation or demolition ordered by the government
  • Volcanic eruptions
  • Vandalism
  • Terrorism

Homeowners insurance cannot be deducted in casualty losses such as:

  • Intentional fire
  • Moth or termite damage
  • Damaged plants or trees because of insect, fungus, and parasite infestations
  • Property loss because of drought
  • Wear and tear
  • Damages caused by your pet
  • Breaking items under normal circumstances

Final Thoughts

Home insurance policy will protect you and your home when undesired circumstances such as damages caused by extreme weather conditions happen. It will also protect you from being responsible for medical or legal expenses when someone got hurt inside your property and a safety net if you have been forced to move into another home.

You can get a lot of advantages from home insurance, however, the premiums you are paying to the insurance company each month is not tax deductible in most cases. By considering the exceptions we’ve listed above, you can determine if you are eligible to deduct your home insurance premiums as expenses from your taxable income.

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