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As a homeowner, you may wonder whether you can deduct your home insurance on your tax return to save money on taxes. The short answer: home insurance is typically not tax deductible, but may be if you own a rental property or operate a small business out of your home. To qualify for a home insurance deduction in those cases though, you’ll have to meet specific requirements.
- Homeowners insurance is typically not tax deductible, but there are some exceptions for rental property owners or small business owners operating out of their home.
- Other home expenses such as capital gains, energy efficiency, mortgage interest, and property taxes may be tax deductible if certain criteria are met.
- Self-employed individuals or those operating a business from home may be able to deduct a portion of their home insurance premium if they meet certain requirements.
- Homeowners may be able to deduct losses from insurance claims not fully covered by their provider if the property loss occurred in a federally declared disaster area.
What is a tax deduction?
A tax deduction is applied to a person or organization’s tax return to lower their taxable income. These deductions are typically available if the person or organization has qualifying expenses throughout the year. When preparing their tax return, individuals with qualifying expenses may choose to take a standard deduction or itemize deductions. If the person or organization chooses to itemize deductions, deductions are only taken for amounts surpassing the standard deduction limit.
According to the IRS, the following expenses qualify for itemized deductions:
- Healthcare expenses, including medical, dental, and prescription drug bills
- Mortgage interest
- Property taxes
While some special circumstances may allow homeowners insurance deductions on one’s tax return when they’re considered job-related expenses, homeowners insurance is not generally considered a qualifying deduction by the IRS.
Is home insurance tax deductible?
If you use your home as your primary residence, your home insurance is generally not tax-deductible, even if you itemize your deductions on your tax return. But if you own a rental property, you usually can deduct insurance premiums you pay to protect your investment property.
While home insurance protects your home against damages, another type of insurance — mortgage insurance — protects the lender if you default on the loan. For more information, use this IRS’ tax tool. If you need help, consult a tax professional.
Are there home tax deductions for small business owners?
Yes, there are home tax deductions for small business owners. Homeowners and renters who use a room or part of a room exclusively for business purposes may qualify for them. The deduction may include a portion of the related home insurance premiums, mortgage interest, repairs, utilities, depreciation, maintenance and/or rent.
In order to qualify, the home must be the primary residence for the taxpayer and the room must be exclusively used for business purposes. There is a simplified method that may be used for the home office expense deduction, which is $5 per square foot with a cap of 300 square feet, or a $1,500 deduction. The regular method is calculated based on the percentage of the home used for business purposes.
Are there tax deductions for landlords?
The other qualifying entity for homeowners insurance tax deductions is landlords. If you receive rental income from your home, you may be able to deduct a portion of your homeowners insurance policy on your tax return for the area of the home being used as a rental.
The same rules apply here as they do for home offices: Take the square footage used as rental space and divide it by the total square footage of your home. Apply that percentage to your premium to find the total qualifying deductions for your homeowners insurance policy.
If you own and rent out several properties and the properties are only used as a source of rental income, you may be able to deduct the total amount of homeowners insurance from your tax return. Consult with a Certified Public Accountant (CPA) to understand whether or not your homeowners insurance is tax-deductible for your specific circumstances.
What are common home tax deductions?
While home insurance is not generally tax-deductible, other home expenses are:
- Capital gains: If you sell your home and profit from the sale, you may be able to avoid paying taxes on the gain through the capital gains tax deduction. Single filers can exclude up to $250,000 and married filers can exclude up to $500,000 in profit from the home sale. You must have owned the home and used it as your primary residence for at least two of the last five years – and not taken the same deduction of another home sale in the same timeframe – before the sale date to be eligible.
- Energy efficiency: Making your home energy efficient lowers your energy bills and could provide a tax deduction on your primary residence. The tax deduction amount varies by improvement and is a maximum of $500 per item. Installing renewable energy also has different tax credit maximums under the Consolidated Appropriations Act of 2021, offering up to 30% in tax credits for renewable energy systems.
- Mortgage interest: If you itemize your deductions, you may be able to fully deduct the amount you pay in mortgage interest each year on a secured debt. The amount you can deduct varies by the date you took out your mortgage, how much you financed and how the proceeds are used.
- Property taxes: Typically, state and local real property taxes on primary and secondary residences are deductible if you itemize your tax return. The limit you can deduct is $10,000; or $5,000 if married filing separately. If you rent out the second home, restrictions apply.
- Capital expenses: When you make home improvements for personal reasons, the expenses are generally not tax deductible. However, if the improvements you make are medically necessary for yourself, your spouse or dependent, you may be eligible for capital expense deductions. The necessary medical improvements may include building entrance or exit ramps, widening doorways, installing porch or interior lifts, or modifying hallways and kitchen cabinets.
Frequently asked questions
If you’ve experienced a loss on your home and your insurance carrier denies your claim, you may not be out of options: You may be able to deduct the expenses as a casualty loss on your tax return. However, this deduction is only available if the property loss occurred in a federally declared disaster area.
If you take the standard deduction, you cannot deduct property taxes on your tax return. When you itemize deductions, you may qualify to deduct certain home expenses, such as real estate and personal property taxes.
Certain home expenses may be tax deductible if you meet underlying criteria. For instance, you may be eligible to deduct mortgage and home equity loan interest, discount points, property taxes, necessary home improvements, home office expenses, capital gains and mortgage insurance on your taxes. Working with a seasoned tax professional can help you identify what is tax deductible so you can maximize your return.
If you’re self-employed or operate a business at home, you may be able to deduct a portion of your home insurance premium if you meet certain requirements. Contact a tax professional if you need help determining whether you qualify.