Is Home Insurance Tax Deductible?

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One major benefit of real estate investing concerns the various tax deductions available. While homeowners’ insurance premiums for your residence are not tax-deductible, as a real estate investor, you are able to deduct homeowners insurance premiums on a rental property as a business expense.  

What Is Home Insurance?

Homeowners insurance, or property insurance, covers damage to the home and protects homeowners from liability if someone is injured on the property.

If you own a property outright, homeowners insurance is not required, although carrying it is certainly advisable. While homeowners insurance costs are rising, home insurance offers compensation if disaster strikes and offers liability protection.

If you have mortgage debt on the rental property, the lender will require that you carry sufficient homeowners insurance. Lenders are protecting their investment in your property.

Personal Residence vs. Rental Property Home Insurance

When it comes to your personal residence, the IRS does not permit you to deduct your home insurance premiums on your federal tax return. When it comes to business purposes, the ability to deduct insurance premiums is completely different.

The entire amount of homeowners insurance premiums on a rental property is tax-deductible.

Landlord Insurance

Homeowners insurance may prove sufficient if you only receive rental income on your property occasionally. That’s the case if a big event is coming to your town and you rent your home out to guests attending. Most homeowners insurance covers that exception, but if you are self-employed as a landlord, you need homeowners insurance tailored to small business owners.

A landlord policy is also known as a dwelling form 3 policy. Unlike dwelling form 1 or 2 policies, a dwelling form 3 policy covers the home for full replacement value rather than the depreciated value.

Besides property damage and liability, landlord insurance can protect you from rental income lost due to the dwelling’s temporary lack of habitability after a fire or similar issue.

Renters Insurance

As a landlord, it is wise to require that your tenant carry their own renters insurance policy to safeguard their own possessions. Your homeowners insurance does not cover damage or loss of a tenant’s belongings.

Such an insurance policy is not expensive. This requirement can lower the landlord’s home insurance premium.

What Does Your Homeowners Insurance Policy Cover?

It’s vital to read your homeowners insurance policy thoroughly to understand what it does and does not cover. Look at the declarations page of the homeowners insurance policy.

Look at what is excluded from your homeowners insurance. As noted, you must purchase additional coverage and pay more for separate insurance premiums for earthquake or flood insurance.

The same holds true for mudslides, landslides, or sinkholes, although there are exceptions for the latter in Florida. Some policies may exclude other natural disasters, such as tornadoes or hurricanes, when high winds are involved. If these conditions are common in your region, you can purchase condition insurance, also known as gap insurance, from your insurer.

How to Classify Home Insurance Repairs

Knowing how to classify rental business property repairs is essential. For example, say a tornado strikes your property and you need a new roof. How would that affect your taxes?

You can take tax deductions on repairs made after a federally recognized disaster for your own home. However, for rental business property, the casualty damage from a sudden, unexpected event is not subject to whether it is located in a federally declared disaster area.

The key word here is “sudden.” You can’t take a tax deduction for the slow deterioration of your business property over time.

Usually, you can deduct such losses in the year in which the casualty took place. If you are in a presidentially declared disaster area, you have the option of deducting the loss from your prior year’s tax return. You should receive a prompt tax refund, as you will receive funds from part of the previous year’s taxes.

Other factors which reduce tax deductions for repairs for business rental property include:

  • Receiving a federal disaster loan that is forgiven
  • Value of repairs provided by a relief agency
  • Any tenant repairs you did not pay for

Note that cleanup costs are not tax-deductible.

Finding a Homeowners Insurance Agent

If you have a good insurance agent for your primary residence, they may be able to provide homeowners insurance for your rental property. You can also ask your real estate agent for recommendations.

For best results, interview at least three agents and ask them to run a sample property.

Whether you have one rental or several properties, ask the insurance agent the following questions regarding homeowners insurance:

What comprehensive coverage is offered?

Comprehensive coverage covers not only the home but all buildings on the property and your personal belongings. While this is the most type of homeowners insurance, specific exclusions may apply.

You may have to purchase additional insurance to fill those exclusionary gaps.

Is the property in a flood or earthquake zone?

Just because your property is not near water does not mean it isn’t located in a flood zone. If that is the case, protect your investment property by purchasing flood insurance, or earthquake insurance if such land movements are common in your area.

What information does the insurance company need?

To determine your coverage quote, the insurance agent needs the following information about the property:

  • Year built
  • Total square footage
  • Construction type: Wood, brick, concrete, etc.
  • Roof condition
  • Age of mechanicals
  • If and when major upgrades were made

How to Save Money on Homeowners Insurance Premiums

As a landlord, expect to pay about 25% more on a business policy than the policy covering your own home.

You can save money on your homeowners insurance by increasing the amount of your deductible. That’s the amount you must pay out of pocket after a claim before your homeowners insurance kicks in.

If you own multiple properties, you can reduce your homeowners insurance premiums by having them all insured under one policy. Ask your agent about discounts.

Keep your properties well-maintained and safe. That not only attracts good tenants but keeps you in good stead with insurers. Make sure your properties are well-lit, clean, and have working smoke detectors and fire alarms, as well as security cameras.

Homeowners Insurance is Vital for Investors

Homeowners insurance for investment properties is essential but also complicated. Consult a certified public accountant or similar tax professional to guide you in matters pertaining to your insurance costs and federal taxes. Should disaster strike, knowing your business property is properly insured makes a huge difference.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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