Is Homeowners Insurance Tax-Deductible?

No, in general: The majority of homeowners insurance costs are not tax deductible on your federal tax return. This includes both your home insurance premium and any property losses you sustain, regardless of whether the losses are covered by homeowners insurance.

There are a couple of exceptions: If you use part of your home for business purposes, you can deduct a portion of your home insurance premium on your taxes, and you can deduct any uninsured financial losses if your home is damaged in a federally recognized disaster.

When homeowners insurance premiums can be deducted from taxes

Homeowners insurance premiums are typically ineligible for deduction on an income tax return because the majority of people only use their home for personal purposes (i.e., living in it). As a result, the Internal Revenue Service (IRS) considers homeowners insurance premiums, like utility bills, to be nondeductible payments.

This also applies to all types of personal home insurance, such as hazard coverage, liability coverage, and more specialized forms like earthquake insurance or flood insurance. If the coverage is only for personal use at home, no premiums can be deducted.

However, there are some circumstances in which a homeowner's insurance and other related insurance premiums can be deducted. Given the high cost of homeowners insurance, the write-off is something that every policyholder should take advantage of if they can.

Deducting insurance premiums for a home office

When a policyholder has a home office, one of the few situations in which homeowners insurance premiums can be deducted on a tax return. A homeowner can deduct the same percentage of their housing expenses that were allocated to the home office from their homeowners insurance premiums. For example, if a policyholder spends 10% of their housing expenses on their home office, they can deduct 10% of their home insurance premiums for that year.

Not every room with a desk qualifies as a home office for tax purposes. In order for a portion of the premium to be written off, a workspace must qualify for a home office deduction and be covered under a person's homeowners insurance policy.

Any office, free-standing structure, or garage can qualify for the write-off as long as it is used to conduct business. It should also be the primary location from which the business operates. If a person conducts business outside of their home, they may still be eligible for the home office and homeowners insurance tax breaks.

A home business might require additional insurance coverage

Depending on the type of business someone runs out of their home, a policyholder's homeowners insurance may not cover the total value of the business property on site, or may not cover the type of business at all.

If you run a small stationery business out of your apartment, for example, most homeowners insurance policies will cover related business materials such as paper, computers, and pens up to a few thousand dollars. However, if a policyholder runs a daycare out of their home, their homeowners insurance company will almost certainly require them to purchase an endorsement or a separate commercial insurance policy.

Deducting homeowners insurance losses: Only in a disaster

Losses incurred as a result of personal injury or theft are generally not deductible, regardless of whether the loss is covered by insurance. Only if the loss occurred in a federally declared disaster area and was caused by the disaster is there an exception. In 2019, for example, federally declared disasters included hurricanes Barry and Dorian, as well as several floods, winter storms, and wildfires.

You cannot deduct the amount of a claim settlement from your taxes if you file an insurance claim related to a federally declared disaster. If, on the other hand, your insurer only partially reimburses you, you can deduct the remaining value of the lost property that was not reimbursed. If you have actual cash value coverage on your property, this amount may include your home insurance deductible as well as depreciation.

You must deduct $100 per incident, as well as 10% of your adjusted gross income (AGI), from the total dollar amount of damage, in addition to the value of the damaged property. If you itemize your deductions, you can deduct whatever is left over on your federal taxes.

You may also not deduct the cost of home improvements that go above and beyond the cost of repairs. So, if you spend extra money to improve your house to a better condition than it was before the disaster, those costs will not be tax-deductible.

Assume a homeowners insurance company pays out $10,000 for a $15,000 deck that was destroyed in a hurricane. In that case, the homeowner would be able to deduct $4,900 of the loss, minus 10% of your AGI, according to the IRS's formula. However, if you spent an additional $20,000 to make the deck nicer than it was before, you would not be able to deduct the additional expense.

Deducting private mortgage insurance

Mortgage insurance premiums are no longer deductible as of the 2018 tax year. If you pay your mortgage, home insurance, and PMI through a single escrow account, you should be aware that the majority of this is not tax deductible. In most cases, the only tax-deductible portion is the mortgage interest.

Deducting insurance costs for rental properties

Insurance premiums for a rental property can be deducted on a federal tax return. The costs of those premiums are considered business expenses, and landlords, like most other business owners, have the option of deducting those costs.

The tax-deductible portion of your insurance premium is determined by the percentage of the premium that covers the rental property. If you rent out your home's basement apartment, for example, you can only deduct the portion of your homeowners insurance premium that covers the basement.

If you own and rent a separate home or condo that is not connected to your primary residence, you can deduct the entire landlord insurance policy that covers that rental unit.

Landlords can also deduct other insurance policies related to their rental business, such as an umbrella policy that expands their liability coverage.