As a homeowner, you know the costs of maintaining a property can add up. And home insurance is one of those unavoidable expenses. With that in mind, you might wonder if there’s any way to lighten the load, like claiming your home insurance payments as a tax deduction. The answer? It’s not as simple as you might hope.
Keep reading to learn the ins and outs of home insurance and taxes, including when it might be deductible and when it’s not. Plus, we’ll highlight other tax breaks homeowners can take advantage of. Understanding these rules could save you money and help you make the most of available deductions.
Are home insurance premiums tax-deductible?
For most homeowners, the answer to the question of whether home insurance premiums are tax-deductible is a firm “no.” According to the IRS, home insurance is generally considered a personal expense, meaning it isn’t deductible for personal use. In other words, if you’re just insuring your primary residence, you can’t claim that cost on your taxes.
Why? Because tax deductions are generally reserved for business expenses or costs related to generating taxable income. Since your home is a personal asset, it doesn’t qualify.
But when it comes to tax deductions for homeowners, there are exceptions that might apply to your situation.
Exceptions: When home insurance can be tax-deductible
While most homeowners can’t deduct their home insurance, there are a few specific scenarios where you might qualify:
Do you have a rental property or investment home?
If you own a property that you rent out, the insurance premiums for that property can be tax-deductible. In this case, your home is considered a business asset because it generates rental income. The IRS allows for rental property deductions, including insurance premiums, as long as the property is being used for rental purposes and not for personal use.
- For example:
Let’s say you own a two-family home and live in one unit while renting out the other. The premiums for the insurance covering the rental unit can be deducted as a business expense.
Are you a freelancer, or are you self-employed and working out of a home office or workspace?
If you’re self-employed and dedicate a specific part of your home solely to your business, like a home office, artist’s studio, or commercial kitchen, you might qualify to deduct a portion of your home insurance premiums. This falls under the home office deduction, which allows you to claim expenses tied to any space exclusively and regularly used for income-generating activities—insurance included. The amount you can deduct depends on the percentage of your home that the space occupies.
- For example:
Suppose you use 20 percent of your home as an office for your freelance graphic design business. You may be able to deduct 20 percent of your home insurance premiums, along with other related expenses like utilities and internet bills.
Do you have a “Business-Related Coverage” rider on your home insurance policy?
If your home insurance covers specific business-related risks, such as property damage to a home-based business, that portion of the premium may be deductible. The IRS allows business owners to deduct the cost of insurance premiums that are directly tied to their business operations.
- For example:
If you run a daycare center from your home, and your home insurance policy includes coverage for business-related liability or property damage, you might be able to deduct that portion of your premium.
So, what is tax deductible for homeowners?
Even if your home insurance premiums aren’t deductible, there are still other ways to save on taxes as a homeowner. These tax breaks can help offset some of the costs of homeownership and potentially reduce your overall tax bill.
- Mortgage interest deductions
One of the most well-known tax breaks for homeowners is the mortgage interest deduction. Homeowners who itemize their deductions can deduct the interest paid on their mortgage loan for their primary residence. This is often one of the biggest tax breaks for homeowners, especially in the early years of a mortgage when the interest portion of your payment is higher. - Mortgage points deductions
If you’ve paid mortgage points when buying or refinancing your home, you might be able to deduct them from your taxes. What are mortgage points? They’re the upfront fees some homebuyers choose to pay to lower a mortgage interest rate. These points are considered prepaid interest, and you can typically deduct them in the year you paid them, especially if they were part of your original mortgage. For refinanced loans, the deduction may be spread out over the life of the loan. - Property tax deductions
In addition to mortgage interest, there’s another major perk for homeowners: property tax deductions. So, how does tax deduction work for a homeowner’s property taxes? Simply put, the amount you pay in property taxes each year can be deducted from your federal tax return — provided you itemize your deductions. - Energy-efficient home upgrades
If you make energy-efficient improvements to your home, you may be eligible for tax credits or deductions. For instance, the IRS offers incentives for things like solar panels, energy-efficient windows, and insulation. These incentives vary from year to year, so it’s important to check current rules. - Home office deductions
As mentioned earlier, if you use a portion of your home for business, you may qualify for the home office deduction. A home office can unlock deductions for more than just your insurance—think utilities, internet, and even part of your rent or mortgage. IRS home office deductions are a valuable tax break for self-employed individuals, freelancers, and small business owners. - Home improvement deductions
While most home improvements aren’t deductible, certain renovations that increase your home’s value or are necessary for medical reasons (e.g., wheelchair ramps, wider doors) might be eligible for deductions. Make sure to consult with a tax professional to see if your improvements qualify. - Threat loss deductions
If your home is burglarized or vandalized, you might be able to claim a theft loss deduction on your taxes. To do this, you’ll need to report the theft to the police and have documentation of the incident. The loss is based on the value of the stolen or damaged items minus any insurance you’ve been reimbursed for. Keep in mind you must itemize your deductions, and the loss needs to exceed certain thresholds outlined in your home insurance policy.
Claiming deductions related to home insurance
If you find yourself in a situation where home insurance premiums are deductible, the process for claiming those deductions is pretty straightforward. Here’s how to stay on track:
Keep good records: It’s a good idea to keep documentation of all home insurance premiums paid. This includes receipts, invoices, and proof of payment. The IRS requires documentation to support your deductions, so if they ask for proof, you’ll need it.
Fill out the right forms: There are a lot of IRS forms out there, and picking the right one for your situation is key to avoiding mistakes and getting the most out of your tax filing. Here are two forms you might need:
- IRS Form 8829 (expenses for business use of your home): If you’re claiming a home office deduction, this form lets you deduct expenses for the part of your home used for business. This can include things like mortgage interest or rent, utilities (electricity, gas, water), home insurance, property taxes, and depreciation. The form helps you figure out the percentage of your home used for business and apply that to your deductible expenses.
- IRS Schedule E (supplemental income and loss): For rental properties, Schedule E is used to report income and expenses from renting out your property. You’ll list things like rental income, property management fees, mortgage interest, repairs, property taxes, and home insurance. It’s the form for reporting rental income and deductions on your tax return.
Stay up to date with U.S. tax laws: Tax laws can change from year to year, so it’s important to stay informed about any updates that could affect your home insurance deductions. Knowing the latest guidelines will help ensure you’re claiming deductions correctly and maximizing your tax benefits, whether it’s new eligibility rules for home office deductions or changes in rental property expenses.
Four common IRS mistakes to avoid
To make the most of your deductions (and steer clear of IRS trouble), watch out for these common mistakes that homeowners often make.
- Not consulting a tax professional: Deductions related to home insurance can be tricky. Any mistake you make could trigger an audit, and nobody wants that headache. It’s always a good idea to speak with a tax professional who can help you navigate the rules and make sure you’re claiming the correct amount.
- Assuming monthly insurance payments are deductible: Not all home insurance premiums are deductible. It’s important to know when you qualify for a deduction and when you don’t. You don’t want to assume you can deduct your premiums just because you own a home.
- Overclaiming your deductions: If you claim more deductions than you’re entitled to, it could trigger an audit. Only claim the portion of your insurance premiums that is related to business or rental use.
- Failing to account for changes in how you’re using your home: If your home’s use changes over time, like transitioning back to a 100 percent personal space from a rental or business use, it’s important to update your deductions accordingly. Not adjusting for changes could lead to incorrect claims and potential IRS issues. Keep track of any shifts in how your home is being used, and ensure your deductions reflect those changes.
Homeowners, get ready for tax time
While home insurance premiums aren’t typically tax-deductible for homeowners, there are some exceptions. If you own rental properties, run a business from home, or have coverage related to your business, you might be able to deduct a portion of your home insurance premium. Plus, there are other tax breaks for homeowners, like deductions for mortgage interest and property taxes.
Make sure you keep good records of your expenses and reach out to a tax professional to help you make the most of these deductions. And if you’re in the market for home insurance, feel free to reach out to The Baldwin Group. We’ll help you find the best policy for your needs, hassle-free, with no obligation and no fees.
For more details, check out IRS resources about home deductions and business expenses, or get in touch with us at The Baldwin Group by calling (813) 939-5288.
