You just bought your first home this year, and as tax season approaches, you might be wondering if any of the expenses that come with homeownership are tax deductible. You probably already know that certain items are — such as the interest portion of your monthly mortgage payment, but what about other expenses? In particular, what about homeowners insurance?
While homeowners insurance isn’t one of the biggest expenses you’ll incur, it isn’t necessarily inexpensive, either. According to a survey by Statista.com, average homeowners insurance rates were $1,249 per year as of 2018, a fairly big increase from an average of $536 per year in 2001.
Since this is something that is part and parcel of owning a house, you might wonder if any or all of your monthly homeowners insurance payments are tax deductible.
The short answer is: usually, your homeowners insurance is not tax-deductible, but the longer answer is…well, complicated. There are instances where you can deduct at least a portion of your homeowners insurance.
Because it’s a bit more convoluted than your standard tax deduction, we consulted the experts. We spoke with experienced real estate agents who are in the know when it comes to homeowners insurance, as well as tax professionals who can share their expertise and knowledge about tax deductions, how they work, and whether or not you can ever deduct your homeowners insurance.
What is homeowners insurance?
Homeowners insurance, which is required by mortgage lenders (and always recommended even if you pay cash for a house), is similar in some ways to auto insurance. If something happens to your house or personal belongings, the typical insurance policy covers repair or replacement costs up to a certain amount. That “something” can include fire, certain weather events and natural disasters, theft of personal property, and more. Separate home policies can be purchased for flood-prone areas.
Real estate agent Jerome Leyba, who sells homes 33% faster than the average agent in his home base of Santa Fe, New Mexico, says that he often fields questions from his clients about homeowners insurance.
“As agents, we all work within the scope of our expertise,” he says, “but every real estate agent usually has some type of discussion with their buyer about homeowners insurance.”
Leyba says that when clients bring up the topic of homeowners insurance, he always advises them to do their due diligence in vetting an insurance agent.
“When you’re getting insurance quotes, you want to connect with local brokers who know the market,” he says. “You might go online and find someone who gives you a better quote, but they don’t know the specifics of your market.”
This would include making sure the agent knows whether your property is in an area where floods are likely (which requires separate coverage), what other natural disasters (hurricanes, tornadoes) are prevalent in the area, as well as the average replacement value of homes where you live.
Understanding coverage is also critical, Leyba explains, stating that it’s especially important when purchasing an older home that might have items that need maintenance.
“If you’re worried about things like sewer issues, insurance can come into play to some extent,” he says. “Some insurance companies will cover pipes all the way out to the street.” This can potentially protect homeowners for things like water damage if those pipes were to break.
Homeowners insurance covers most major damage to a house, but there are several things it doesn’t cover. This includes wear and tear like rust or mold, and general maintenance. Even for those items that are covered, there are coverage limits that can affect just how much your insurance company will pay out if something does happen.
This is where Leyba’s advice of vetting any potential insurance agent comes in handy, as well as making sure you read and understand precisely what your policy does and doesn’t cover.
What does tax-deductible mean?
Scott Greenberg, who owns Hirsch Greenberg Accounting in Illinois and has more than 30 years of experience in the tax industry, says that simply speaking, tax deductions are specifically allowed amounts that reduce one’s taxable income.
“Income is defined as any amount of money that comes into your hands,” he says. “Deductions reduce the amount of the income that is subject to being taxed.”
Greenberg says the primary deduction for a home would normally be the mortgage interest, or the interest you pay each year on your mortgage loan — but he adds that as of right now, many people aren’t even claiming it.
“The IRS has really limited what homeowners can deduct,” he says. “Due to the new rules that took effect in 2018, many people that used to itemize now use the standard deduction.”
Those new rules, known as the Tax Cuts and Jobs Act of 2017, were created to simplify individual income tax for households by expanding the standard tax deduction. As a result, fewer homeowners bother to try to itemize their deductions because the standard deduction is so much higher than any itemization.
“The only real benefit is for a single person,” says Greenberg. “Their standard deduction is much lower than that of a married couple, so they might be able to itemize and get a better overall deduction.”
If you have a rental property, you sometimes need to provide specific insurance to cover tenants. That is also considered an expense.
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Is homeowners insurance ever tax deductible?
For the average homeowner, Greenburg says homeowners insurance is rarely, if ever, deductible. But there are some circumstances that might allow it.
You are self-employed with a home office
If you are self-employed and work out of your home, your home office and expenses relating to it can potentially be tax deductible. The deduction is calculated based on the square footage of the office space, and with that, you can also deduct a percentage of both your utility payments and your homeowners insurance.
“You do have to be self-employed,” says Greenberg, “not just working from home for an employer. If you’re working from home, that doesn’t count.”
Your home office must also meet certain requirements, such as being a designated space where you do business — and you should actually be making a profit from said business.
You are renting out a portion of the property
Did you decide to make a little income from your spare bedroom and get a roommate? If so, you can deduct part of your homeowners insurance.
As a landlord, you might also be able to write off a portion of your utility bills, repairs, legal fees, and advertising costs. The same goes if you have a casita or cottage in your backyard that you want to rent out, although some of the deductions may be different.
“Largely, yes, if your property is an active rental property, you can deduct that insurance,” says Greenberg.
Leyba, who has the added experience of owning investment properties and being a landlord, says that if you’re collecting rent on a property, homeowners insurance can be considered an expense that is tax deductible.
“If you have a rental property, you sometimes need to provide specific insurance to cover tenants,” he says. “That is also considered an expense.”
What other home-related expenses are tax-deductible?
While it’s quite possible you’ll be out of luck when it comes to deducting your homeowners insurance, there are other home-related expenses that you can deduct.
In addition to the interest you pay on your mortgage loan, if you made use of mortgage points when you bought your house, you can deduct those for the same year you paid them. You might also be able to deduct private mortgage insurance (PMI) if your lender requires it for your loan.
Energy-efficiency upgrades can also qualify for a tax break, although Greenberg cautions that these are credits, not actual deductions.
“Depending on the item, you’ll get a credit that is either a set dollar amount or a percentage of what you paid,” he says.
Greenberg explains that larger energy improvements, like solar panels, can net a credit of more than 25% of what you spent, while smaller items, like a high-efficiency water heater or air conditioner, would give you a set dollar amount.
“These credits are also very limited,” he says. “You can only use them once. If you use them on house one, you can’t use them on house two.”
Your annual property taxes are also deductible, but they might not be the first year you own a home.
“Here in Illinois, we pay property taxes in arrears,” says Greenberg. He adds that new homeowners get a credit for their taxes from the previous owner, and they therefore can’t deduct those taxes because they weren’t living in the home at the time they were collected.
Medical upgrades to a house
Buyers can also deduct upgrades to the house that are done for medical reasons. These could include things like a wheelchair ramp, or adapting a shower or tub with railings.
Greenberg says the expenses for those improvements do have to exceed 7.5% of your income in order to be deductible, so these types of deductions tend to be less common.
Making the most of those deductions
Even though your homeowners insurance is rarely going to be tax deductible, like we said, it’s complicated!
In addition to retaining an experienced real estate agent to guide you through the homebuying process and give you recommendations on finding good homeowners insurance, the best thing you can do is consult a tax expert on how to make your tax deductions work for you.
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