When it comes to filing your taxes each year, you may be wondering if you can deduct your homeowners insurance premiums. With tax season just around the corner, it’s important to understand what home insurance costs you can and cannot deduct from your taxes.
Can you deduct homeowners insurance?
In most cases, you cannot deduct the entire cost of your homeowners insurance premiums. However, there are certain circumstances where you may be able to deduct a portion of your homeowners insurance:
- If you use part of your home for business purposes – You can deduct the portion of your premiums that relates to the business use of your home. For example, if you use 15% of your home office for business, you can deduct 15% of your insurance premiums.
- If you rent out part of your home – You can deduct the portion of the premiums that relates to the rental use of your property.
- If your home is damaged by a casualty loss – If your home suffers damage from something like a hurricane, flood, or fire, you may be able to deduct the portion of your premiums that applies to the damaged portion.
So in summary, a full deduction for homeowners insurance is usually not allowed, but partial deductions may be taken in certain situations.
What does homeowners insurance cover?
Before we dive into the tax deductions, it helps to understand what standard homeowners insurance covers. A homeowners insurance policy typically includes these main types of coverage:
- Dwelling coverage – Covers damage to the physical structure of your home.
- Other structures coverage – Covers things like detached garages, sheds, and fences.
- Personal property coverage – Covers your belongings inside your home.
- Loss of use coverage – Pays for additional housing costs if you cannot live in your home due to damage.
- Personal liability coverage – Covers injuries that happen to other people on your property.
- Medical payments coverage – Pays medical bills for people injured on your property regardless of fault.
These different coverages all factor into your total premiums. When thinking about tax deductions, you’ll need to look at which coverages relate to the business or rental use of your home.
Using your home for business
If you use part of your home exclusively for business, you may be able to deduct a portion of your homeowners insurance. There are two ways the IRS looks at deducting home office insurance expenses:
- Regular method – Your deduction is based on the percentage of your home used for business. For example, if you use one room out of five for an office, you can deduct 20% of the insurance premiums.
- Simplified option – You can claim $5 per square foot for up to 300 square feet of office space. With this method your deduction is capped at $1,500.
To qualify for the home office deduction, the space must be used regularly and exclusively for your business. If you also use the space for personal activities, the deduction will not apply.
How to calculate the home office deduction
Here is an example of how to calculate the home office deduction using the regular method:
- Total homeowners insurance premiums: $2,000
- Total square feet of home: 2,500 sq ft
- Square feet of home office space: 300 sq ft
Home office percentage: 300 / 2,500 = 12%
Insurance deduction: 12% of $2,000 = $240
So in this example, you could deduct $240 of your total $2,000 insurance premiums.
Renting out part of your home
If you rent out part of your home, you can deduct the portion of your homeowners insurance that relates to the rental space. The most common examples are:
- Renting out a mother-in-law suite
- Renting out a finished basement
- Renting rooms to boarders
To get the rental deduction, you’ll need to prorate your premiums based on the square footage dedicated to the rental space versus your private residence space. Here is an example:
- Total homeowners premiums: $1,800
- Total square feet: 2,000
- Square feet rented: 500
- Square feet private residence: 1,500
Rental percentage: 500 / 2,000 = 25%
Deductible premiums: 25% of $1,800 = $450
So in this case, $450 of the $1,800 in premiums could be deducted for the rental portion of the home.
Casualty losses
If your home is damaged or destroyed by a casualty event like a natural disaster, you may be able to deduct part of your homeowners insurance premiums. This applies if the current year’s premiums help cover the damage from a past casualty loss.
According to the IRS, you can deduct “the part of the premiums that provides coverage for similar future damage for the period before the current contract expires.” This deduction has additional limitations and restrictions, so consult a tax professional if you have suffered a casualty loss.
Premiums you CANNOT deduct
While the situations above allow for partial deductions, there are many instances where your homeowners premiums do not qualify:
- You cannot deduct premiums for personal residence coverage.
- You cannot deduct premiums for personal belongings coverage.
- You cannot deduct premiums if you do not use your home for business or rental purposes.
- You cannot deduct premiums for stand-alone flood insurance policies.
- You cannot deduct premiums for stand-alone earthquake insurance policies.
The general rule is that any premiums related to personal coverage for your primary residence will not be tax deductible.
Claiming the deduction
If you qualify for one of the homeowners insurance deductions described above, here is how you claim it on your federal taxes:
- Deduct rental portion on Schedule E
- Deduct business portion on Schedule C
- Deduct casualty loss portion on Schedule A if you itemize
Be sure to keep detailed records showing how you calculated the deductible premium amounts. The IRS may ask for proof to back up your deductions.
Tax-deductible premium examples
Let’s look at some examples of how homeowners insurance deductions would work.
Case study 1
- Brad runs an accounting business from a home office.
- The home office is 12% of the total square footage.
- Brad pays $1,500 annually for homeowners insurance.
Brad can deduct 12% of the $1,500 premiums on Schedule C.
0.12 x $1,500 = $180 tax deduction
Case study 2
- Molly rents her finished basement as an apartment.
- The basement is 750 sq ft out of total 2,250 sq ft.
- Molly pays $2,400 annually for homeowners insurance.
Molly can deduct 33% of the premiums on Schedule E.
750 / 2,250 = 33%
0.33 x $2,400 = $792 tax deduction
| Case Study | Home Use | Premiums | Percent Deductible | Deduction Amount |
|---|---|---|---|---|
| Brad | Home office | $1,500 | 12% | $180 |
| Molly | Basement rental | $2,400 | 33% | $792 |
Factors that affect premium deductions
When calculating your allowable deduction, here are some factors to keep in mind:
- Actual business use – Your deduction depends on actual exclusive business use, not an estimate.
- Hours used – Prorate if you use the office space part time for business and personal time.
- Storage areas – You cannot deduct premiums for storage spaces not regularly used for business.
- Associated expenses – You can deduct insurance costs associated with the business space (utilities, etc).
Tracking precise business usage is key. The IRS may disallow deductions that seem inflated or unsupported.
Impact on mortgage interest deduction
Claiming deductions for homeowners insurance can also impact your mortgage interest deduction if you itemize. When you deduct part of your home for business or rental use, you must prorate the mortgage interest accordingly.
For example, if you deduct 15% of your home for an office, you can only deduct 85% of the mortgage interest. Work with your tax professional to understand the full impact.
Reducing your homeowners premiums
Since deducting your full premiums is difficult, an alternative is to work on reducing your homeowners insurance costs overall. Here are some tips:
- Compare quotes from multiple insurers
- Increase your deductible amount
- Improve home safety and security
- Ask about discounts (alarm system, bundling, new roof, etc)
- Maintain good credit score
- Seek group or affiliate discounts
Taking steps to lower your premiums achieves a similar net effect as the tax deduction. This approach also helps reduce insurance costs that are not deductible.
The bottom line
Deducting homeowners insurance premiums can get complicated quickly. In summary:
- You cannot deduct full premiums for a primary residence
- You can deduct portions related to business, rental, or casualty
- Accurately calculate and document the deductible percentage
- Prorate mortgage interest deductions accordingly
- Work to reduce overall insurance costs where possible
Homeowners insurance likely will not provide a full tax deduction, but partial deductions are allowed in many cases. Consult a tax professional to ensure you claim all legitimate deductions.