Homeowners insurance premiums usually cannot be deducted from a tax return. As a rule, the IRS (Internal Revenue Service) considers the cost of insuring your house to be no different from any other household expense, like the cost of utilities or wages paid to domestic help. But there are some cases in which premiums for homeowners insurance are deductible. Considering the cost of homeowners insurance, the write-off is definitely something a policyholder should take advantage of if they can.
Here’s what can make at least part of your home-insurance costs eligible for a tax deduction:
Premiums For Insuring Your Home Office
If your home office is deemed tax-deductible, all related expenses can be deducted, including insurance for that space. The allowed proportion is the same percentage of housing expenses that were allocated toward the home office. For example, if 10% of a policyholder’s housing expenses go directly toward that home-office space, you can write off 10% of your home-insurance premiums for that year.
Not every space used for work qualifies as an office space that’s deductible. For starters, the space must be used exclusively for work; you can’t deduct the cost of the space occupied by your kitchen table, for example, because you sometimes spread out work on it. And the space must be either the principal location for your own business, or a place in which you regularly meet with customers or clients.
Depending on the business someone is running out of their home, a policyholder might find their homeowners insurance won’t cover the total value of the business property on site, or won’t cover the type of business they run at all.
For example, if someone runs a small stationary business out of their apartment, most homeowners insurance companies would cover the related business materials up to a few thousand dollars. But a policyholder who operates a daycare out of their home will likely be required by their homeowners insurance company to purchase an endorsement or a separate commercial policy. Premiums for those additional policies might be deductible, but the homeowners’ insurance may not be.
A Loss Your Insurance Didn’t Cover
If you suffer a home-related loss that’s only partially reimbursed by your insurer, you may be able to deduct the remaining value of the lost property that was not reimbursed.
For example, say a homeowners insurance company pays out $10,000 for a $15,000 deck destroyed in a fire. In that situation, the homeowner would be able to write off a $5,000 loss for the deck, according to the IRS.
A theft or casualty loss can also be deducted on a federal tax return, but a number of stipulations apply. Like other losses, such as those caused by a fire or wind damage, a policyholder can only write off what they were not reimbursed for. For example, if a homeowners insurance company reimburses a policyholder $2,500 for jewelry valued at $3,000 (assuming they had a $500 insurance deductible) then they would not be able to write off any of the loss.
Any loss due to theft that is unclaimed can be deducted on your federal tax return, as long as it meets certain requirements. Whatever the value of the property stolen, the owner must subtract $100 per incident as well as 10% of their adjusted gross income. Whatever amount is left over can be deducted on the federal taxes.
The Cost Of Private Mortgage Insurance
Premiums for private mortgage insurance, which protects a mortgage lender in the event a borrower defaults on their loan, can be written off on a federal tax return. Even though private mortgage insurance protects the lender, the cost of the premiums is paid for by the borrower and is usually part of their mortgage payment.
For some borrowers, this could be a significant deduction, since the cost of a mortgage insurance premium could be as high as 1.2% the cost of the loan value. The loan-to-value and claim payout ratios, as well as the borrower's FICO score, all impact the cost of mortgage insurance premiums.
Mortgage insurance premiums for policies through the Department of Veterans Affairs or Rural Housing Service are not subject to the same rules. Homeowners paying mortgage insurance premiums through those agencies should consult the IRS website and their policy regarding their federal tax return.
Premiums that Cover Rental Properties
Homeowners insurance premiums for policies that cover a rental property can be deducted on a federal tax return. The cost of those premiums is considered a business expense and, like most other business expenses, the benefit of writing that expense off is available to landlords.
The deductible percentage of homeowners insurance premium cost is dependent on the rental property. If someone is renting a basement apartment of the landlord’s home, the landlord can only write off a portion of their homeowners insurance premium, since it is covering more than the rental property.
If a landlord owns and rents an independent home or condo that is not connected to their personal residence, they can write off 100% of the homeowners insurance policy covering that rental unit.
Landlords can also write off other insurance policies affiliated with their rental business, such as an umbrella policy expanding their liability coverage. Regardless of whether a landlord’s homeowners insurance coverage covers the same home as their renters, they should be able to deduct the premiums for an umbrella policy.
The article Home-insurance Expenses that May Be Tax-deductible originally appeared on ValuePenguin.