Is homeowners insurance tax deductible? 

If you just bought a house or are looking into homeownership, congratulations! 

By this time, you’re probably wondering what financial benefits your new home might get you. Homeownership comes with a lot of unexpected perks that you may not know much about yet. 

Owning a home is different than having money in the bank. While real estate is not a liquid asset, it still holds significant value, sometimes even more than cash.

Plus, owning a home can also save you money on your taxes. Some of the costs associated with homeownership — like mortgage insurance and property taxes — are actually tax-deductible.

What is a tax deduction?

A tax deduction is a way of reducing your taxable income so that your tax payments decrease. Certain expenses are deductible from your income. By claiming these deductions, you’ll owe the IRS less money when you go to pay taxes in April.

Owning a home opens up the door to some deductions that aren’t available to renters. Mortgage interest, local property taxes, and mortgage insurance premiums are tax-deductible home expenses. 

Homeowners insurance protects your home and personal property. If your house is damaged or destroyed due to a covered peril such as fire, lightning, windstorm, hail, or even water damage, home insurance may pay for all or part of it.  Most homeowners insurance policies also cover any potential liability for injuries caused to others. 

Homeowners insurance policies do not usually cover all types of loss. Your home may need a separate policy for earthquake and flood. These policies are typically available through the private market or organizations like FEMA or the California Earthquake Authority (CEA). 

Requirements for these insurance types vary by state.

What’s the difference between homeowners insurance and mortgage insurance?

New homeowners might get these two types of insurance mixed up, so let’s take a moment to talk about the differences.

Homeowners insurance covers real estate in case of damage or disaster. The premiums you pay for homeowners insurance are not tax-deductible, except for specific situations.

Mortgage insurance protects your mortgage lender if you can’t make payments on the loan. Even though it’s for the lender, you pay the premiums. This is often included in your monthly mortgage payment. Unlike homeowners insurance, mortgage insurance payments are tax-deductible without any footnotes. 

Can you write off your homeowners insurance on your taxes?

While homeownership does come with some tax write-offs, your home insurance premiums usually aren’t on the list. If you work outside of your home, you probably won’t be able to deduct your insurance premiums.

However, there are a few situations where your homeowners insurance can lead to some incredible tax benefits.

Tax-deductible situation #1: You rent out your home

If you rent out your home for all or part of the year, your homeowners insurance premiums are tax-deductible. Be careful, though — if you live in your home full-time, you aren’t eligible, even if you rent out part of the house.

Remember that rental properties might require other insurance coverage, sometimes called “landlord insurance.”

Tax-deductible situation #2: You work from home

If you have a home business, that could help decrease your payments. You could write off parts of your homeowners insurance premium payments as a business or self-employed tax deduction. 

Let’s get the bad news out of the way first. If you work remotely for a company in a salaried or hourly position, you don’t qualify for this. So, if you fill out a W-2 when filing your yearly taxes, your homeowners insurance is not deductible. 

You also can’t deduct premiums paid out for flood or earthquake insurance. Any disaster relief assistance payments would be considered untaxed income. If you receive money for disaster relief, that income isn’t taxed. However, disaster relief insurance premiums aren’t tax deductible.

But what about freelancers? What about running a small business out of your home?

Well, in that case, you may be in luck. You won’t be able to write off your whole insurance premium, but you could potentially write off a percentage based on the amount of space you work from. To do this, you must have a part of your home that is used only for business purposes and nothing else.

How can I calculate the tax deduction for homeowners insurance?

If you fit into one of the situations where your homeowners insurance premiums are considered tax-deductible, you might be wondering how you can calculate your benefit. 

First things first. To claim any tax deductions, you need to be very organized and keep track of all your expenses. Whether you DIY or hire a tax professional, the IRS will want to see receipts for any itemized deductions you claim.  

Rental deduction

If you have a rental home, your homeowners insurance falls under the umbrella of rental expenses. Yes, these are tax deductible.

Homeowners insurance can be reported as a deduction on Schedule E of your tax return with property taxes, repair costs, and operating expenses. As long as you keep careful records, you should be able to deduct your entire premium from your rental income.

Home office deduction

If you have a home office, deductions are calculated as a percentage.

So, you can’t write off your whole homeowners insurance premium if you work from home. You can only write off the part of your home that you use just for business purposes alone.

If you’re deducting your home office, you need to do a few things. First, make sure that your home office space is used exclusively for work. 

If your home office space is used for anything other than work activities, you won’t be able to deduct any of your homeowners insurance payments from your taxable income. It can’t double as a guest bedroom, storage space, or game room.

Once you’ve declared that your home office is only used for work, there are two ways you can calculate your tax deduction. 

Simplified formula for home office deductions

If you don’t want to spend a lot of time crunching numbers, you can use the simplified formula. With this method, you can deduct $5 per square foot of space used exclusively for business purposes in your home, up to 300 feet or $1500. This dedication goes on schedule C. 

Regular formula for home office deductions

This method is a bit more tricky, but it may be a smart move if you have a big home office or pay high insurance premiums. 

To use the regular formula, you’ll need to calculate the exact percentage of your home that your office takes up. Costs related to your home, if you work there, are counted as indirect business expenses. Indirect expenses are costs that are not entirely for your business and are not directly related to your work.

An easy way to figure out what percentage of your home counts as your office is to divide the square footage of your office by the total square footage of your house.  

After dividing, the number that you get is the percentage of your homeowners insurance that you can deduct from your taxes. To claim this deduction, fill out IRS form 8829 and transfer the required information from that form to your schedule C. 

A quick warning about using the regular formula: it might get some extra attention from IRS officials. Be careful when doing these calculations, and make sure they’re entered correctly and that you have the correct documentation to back them up.

If you have any doubts, it’s probably a good idea to consult a professional to make sure your tax deductions are done correctly — two heads are better than one.

What other home expenses are tax deductible?

Homeowners insurance isn’t the only house-related expense you can claim as a tax deduction. There are a few other expenses that the IRS allows taxpayers to deduct from their income taxes. 

Home mortgage insurance premiums, home mortgage interest, and state and local property taxes are all tax-deductible expenses that homeowners could potentially claim on their taxes.

Home improvements made for health reasons are also deductible in some situations. Fans of solar panels and similar upgrades are in for a treat — energy-efficient upgrades can also count as homeowners insurance deductibles.

How can I get a quote for homeowners insurance?

Are you ready to purchase a home or want a review of your Homeowners Insurance? Connect with an Expert Agent today to get a free homeowners insurance quote.

Sources:

Credits and Deductions | Internal Revenue Service

Publication 530 (2021), Tax Information for Homeowners | Internal Revenue Service

What Is Mortgage Insurance and How Does It Work? | Consumer Financial Protection Bureau

Your homeowners insurance may be tax deductible if you’re self-employed and work from home | Business Insider

Disclaimer: 

*Savings, if any, vary based on the consumer’s profile and other factors. Contact your insurance agent for more information. Restrictions apply.

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