ShareWhen it comes to owning a home, understanding the nuances of insurance is essential. If they itemize, homeowners can deduct their mortgage interest and property taxes from their taxable income. However, homeowners insurance is tax deductible only under limited circumstances.
What Is the Difference Between Homeowners Insurance and Mortgage Insurance?
Homeowners insurance covers damage to the property and liability or legal responsibility for injuries that may happen in it. Most damages are covered by homeowners insurance, with the exception of earthquakes, flooding, and poor maintenance. The most popular policy, HO-3, covers the home structure and personal belongings for disasters including fire, hail, lightning, freezing, theft, and vandalism.
Mortgage insurance protects the lender if the homeowner falls behind on their monthly payments. The premiums are factored into the total costs of borrowing and closing.
Mortgage Insurance Deduction
While the deduction for mortgage insurance premiums expired in 2021, the Department of Housing and Urban Development announced it would lower mortgage insurance premiums by 0.3 percentage points. Read how lower mortgage premiums will help affordability.
Is Homeowners Insurance Tax Deductible?
If the property in question is your main home, the answer is no, your home insurance is generally not deductible.
However, REALTORS® can educate homebuyers on instances where homeowners insurance may be a deductible expense. Let’s review a few of those common scenarios.
Your Business Operates From Your Home
To qualify, the home must be your principal place of business. The insurance premium that covers the portion of your home that is dedicated to an office space to run your business or for the storage of inventory can be deducted as part of a home office deduction.
If you run a day care facility from home, the deduction is generally prorated based on time instead of square footage. Also, your business must be licensed under state law to qualify for this deduction.
The Home Is a Rental
Homeowners insurance on property used to produce rental income is tax deductible. If you rent a portion of the home, only that portion rented is tax deductible.
Other common rental property tax deductions include mortgage interest, property taxes, depreciation, operating expenses, repairs, and travel expenses to collect rental income or manage the property.
Theft or Loss Claim
If you suffered a loss to your property from theft or some casualty event, you may be able to claim a casualty loss deduction under very limited circumstances. Prior to 2018, casualty and theft losses were generally deductible wherever they occurred, but since 2018, they are generally only deductible if the damage was caused by a presidentially declared disaster.
Maximizing your tax deductions requires many considerations. Consult a qualified tax professional to determine how and when these expenses qualify as tax deductible.