Is Homeowners Insurance Tax Deductible?
Is homeowners insurance tax deductible? Understand when your premiums qualify for deductions and what other housing costs are.
Homeowners insurance provides financial protection against unexpected damage or loss to a home and its contents, covering perils such as fire, storms, and theft. For most homeowners, premiums are not tax deductible. However, a full or partial deduction is possible when the home or a portion is used for business or income-generating activities. Understanding these distinctions clarifies when homeowners insurance can offer a tax benefit.
Personal Residence Premiums
Homeowners insurance premiums for a personal residence are not tax deductible. The IRS considers these personal living expenses, similar to utility bills or general maintenance for a private dwelling. This classification applies whether the property is a primary residence, a vacation home, or any other dwelling used solely for personal habitation. The IRS views these expenditures as non-business and non-income-producing.
Expenses that maintain a personal asset do not qualify for a tax deduction. While real estate taxes on a primary residence are often deductible, homeowners insurance premiums are not, as they are distinct types of expenses with different tax treatments.
Business-Related Deductibility
Homeowners insurance premiums, or a portion, can be tax deductible under specific business-related circumstances, such as when a residence generates income or serves as a principal place of business.
When a property is rented out, homeowners insurance premiums become a deductible business expense against the rental income generated. If only a portion of the home is rented, the deductible amount must be prorated based on the percentage used for rental purposes. This proration is calculated by dividing the square footage or number of rooms dedicated to the rental activity by the total square footage or rooms of the property.
A portion of homeowners insurance can also be deducted if part of the home is used exclusively and regularly as a principal place of business for a qualified home-based business. This home office deduction requires the space to be used solely for business activities. The deductible amount is determined by the percentage of the home’s total area used for the qualified home office. This deduction is claimed by self-employed individuals, not by employees working remotely.
Commonly Confused Housing Deductions
While homeowners insurance premiums for a personal residence are not deductible, other common housing-related expenses often qualify for tax deductions. Home mortgage interest is a deduction for many homeowners. Taxpayers who itemize deductions can deduct interest paid on mortgage debt, up to certain limits. For mortgages incurred after December 15, 2017, the deduction limit is $750,000 of indebtedness ($375,000 if married filing separately); for older mortgages, higher limits may apply.
State and local real estate taxes are also deductible, which can be confused with homeowners insurance. This deduction is subject to the State and Local Tax (SALT) cap. The SALT deduction, which includes property taxes, state income taxes, or state sales taxes, is capped at $10,000 per household for tax years 2018 through 2025. Interest paid on loans for substantial home improvements may also be deductible. This applies to loans secured by the home, such as home equity loans or lines of credit (HELOCs), provided funds are used to buy, build, or substantially improve the taxpayer’s main or second home.