Owning a home comes with various expenses. Whether it’s property taxes, maintenance, and repairs, utilities, homeowner’s insurance, or property management, you’re sure going to spend some cash every month to keep your property. On the other hand, owning a property also offers various benefits, such as tax breaks.
So, is home insurance tax deductible? Many homeowners wonder whether they can deduct their insurance expenses from their tax obligations. In essence, homeowner’s insurance isn’t considered tax-deductible, according to the Internal Revenue Service (IRS).
However, this doesn’t mean it’s all doom and gloom. There are a few special cases where it’s possible to itemize your insurance payment on the tax return. However, even in these special cases, you’ll need to meet a few requirements.
In today’s article, we look at what a tax deduction is and the types of tax deductions available for homeowners. This is the best guide if you’ve been wondering, is house insurance tax deductible?
What Is a Tax Deduction?
A tax deduction refers to a deduction that is applied to an individual’s tax return to lower their tax liability. Basically, deductions are expenses that you accumulate over the year and can be subtracted from your gross income to calculate how much tax you owe the government.
When you’re preparing your tax returns, you can choose to make a standard deduction or itemize the deduction list. If you choose to itemize the deductions, the deductions will only be taken for any amounts that are more than the standard deduction limit.
Here are some of the expenses that IRS qualifies for itemized deductions:
- Healthcare expenses, such as dental and medical bills
- Property taxes
- Mortgage interest
- Home office or job-related bills
Is homeowners insurance tax deductible? As you can see, homeowner’s insurance, including condo insurance, is typically not tax-deductible. It can only be considered so if it’s considered a job-related expense.
Is Homeowners Insurance Tax Deductible?
If you use your home as your primary residence, your homeowners’ insurance isn’t tax-deductible, even if you itemize your tax deduction list. The only time you may qualify for a tax deduction is if you pay the premiums on rental properties.
Don’t confuse homeowners insurance with mortgage insurance. The latter is required by some mortgage lenders to protect them if you default on the mortgage. Mortgage insurance may qualify for a tax deduction if you meet some particular income requirements and you itemize your tax return.
What Are Some Tax Deductions for Homeowners?
Can you write off homeowners insurance? According to the IRS, it might not be possible. However, as we’ve mentioned, there are a few special circumstances that make your homeowners’ insurance eligible for tax deductions. Here are some deductions you should know about:
Mortgage Points Deduction
To most people, their mortgage will be the largest loan they’ll ever tackle in their lifetimes. You can consider purchasing mortgage points so that you can save money as you pay off your mortgage and also write off some of the interest applied on the loan.
What are mortgage points? They are basically referred to as discount points. You buy them upfront as you close your mortgage. Each mortgage point-bought is usually equal to 1% of the total mortgage amount.
Let’s say you’re purchasing a home worth $200,000 and you can afford to put $2,000 as a downpayment. In this case, you’ll purchase one mortgage point. The mortgage points will help you reduce the interest rate over the duration of your loan. In short, the interest rate reduces depending on the points you buy.
For example, if the market rate is 4.5%, you can get a .25% discount on your loan’s interest rate for each point purchased. One mortgage point may decrease the interest rate to 4.25%, while two points may decrease to 4%. Before buying mortgage points, you may have to talk to your real estate agent and lender to ascertain your eligibility and the requirements for buying.
So, how do tax deductions actually work for mortgage points? Once you purchase mortgage points, you can claim the full amount on your taxes the same year you buy them. While there are some requirements you need to meet, most homeowners in the US meet the standards.
If your mortgage loan is above $750,000, there’s a cap on the maximum amount you can claim your taxes. Your mortgage lender will provide you with Form 1098, which you’ll use to claim the tax deductions and find how many mortgage points you purchased. You’ll enter this amount on line 10 of Form 1040 Schedule A.
We understand this process can be a little confusing. This is why we recommend you talk to your accountant or use tax software to walk you through this step.
Rental Property Deduction
If you rent your home out, you may qualify for a rental real estate deduction. This deduction includes homeowners insurance premiums. You may qualify for this type of deduction even if you rent out part of your homes, such as your spare bedroom, garage, or basement.
While you have to pay the full property taxes on rental income, you can recoup some money on repairs, maintenance, landlord insurance (a major difference between landlord insurance vs homeowners insurance), utilities, and many others.
Let’s assume you own two properties, one in New York and another in Florida. You spend every half of the year in either of the properties and rent out the other. In this case, you can deduct 50% of the home insurance premiums on the home you rent out.
How do you go about this process? Simply check Form 1040 and fill out Schedule E to subtract any rental expenses from your rental income. Again, always consult with a tax professional to ensure you maximize this deduction.
Home Office Deduction
If you’re a self-employed homeowner and you run your business from your home, you can qualify for a home office deduction. You can deduct a portion of your home expenses, which include mortgage, insurance, and utilities.
According to the IRS, the type of properties that qualify for this type of deduction includes a house, condos, apartment, mobile home, or any similar property. You also need to meet the following requirements:
- You must use a section of your home regularly and exclusively for running your business. Say you use a particular room in your home as the home office, you can get a home office deduction from that room.
- Your home is the primary location of your business. While you may still qualify for this deduction if you conduct some business operations, such as meetings, out of your home, the IRS is particular about using your home largely and regularly to conduct your business.
The amount you can deduct will depend on the section of the home you use to conduct business and the method you use to calculate your deduction. You can use the following two methods to calculate your home office deduction:
- Regular option: This method involves calculating the actual expenses you incur by operating your business from home. These expenses include maintenance, utilities, internet, and other costs. Keep in mind that you’ll need to show documentation. For example, if you’re a web designer running your business from 150 square feet of your 1,500 square foot home, you can deduct 10% of your property expenses including homeowners insurance for rental property.
- Simplified option: This method allows you to deduct $5 per square footage in office space. Using the web designer example above, you can deduct up to $750 (15 sq. ft * $5) of home office expenses.
Keep in mind that you must be self-employed to qualify for a home office deduction, not just working remotely. You’re eligible if you are a freelancer, independent worker, or gig economy worker. In short, if you have an employer, you won’t qualify for this deduction.
Energy Efficiency Deductions
The world is now moving towards energy efficiency. Various industries from automotive to real estate are implementing energy-efficient solutions. Many homeowners have not been left behind and are opting to make energy-saving upgrades to their homes.
Did you know that transforming your home to be more energy-efficient will not only save you money in utility bills but also help you save on taxes?
The Residential Renewable Energy tax credit lets homeowners claim credits when they own energy-efficient homes with solutions such as solar, geothermal, wind and fuel-cell systems. Upgrades that qualify for these deductions include solar panels, solar-powered water heaters, wind turbines, and geothermal heat pumps.
You can get this deduction for your primary and secondary homes. As for fuel-cell upgrades, you can only claim them for your primary home. Each credit is worth 30% of the upgrade expense. There are no limits for solar, geothermal, and wind credits.
Home Improvement Deductions
Homeowners regularly carry out improvements to their homes to improve their space and also boost their home’s worth. However, did you know that home improvements also qualify for tax deductions?
Home improvements that increase your property’s worth are referred to as capital improvements. Capital improvements include swimming pools, new roofs, garages, new HVAC systems, home security systems, water heater upgrades, and many more.
You can’t get home improvement deductions on the year you pay for them. However, you can claim them all at once when you sell your house. As such, it’s important that you keep a record of all your home improvements. Talk to a qualified accountant or tax expert to know which of your home improvements qualify for these deductions.
Capital Gains Deductions
Capital gains tax deductions allow you to avoid paying taxes on the profit you get after selling your home. In fact, you might end up not paying a single cent after claiming this deduction.
As a single homeowner filing the claim individually, you can deduct up to $250,000. Married homeowners who claim the deduction jointly can be exempted up to $500,000 from their home’s sale.
What are the requirements to be eligible for this deduction? You must have owned the home and used it as your primary residence for at least two of the past five years. You also need to have not taken another deduction from another home sale within the said time frame.
Mortgage Interest Deduction
A mortgage interest tax deduction allows you to claim the total amount of cash you paid to your mortgage interest within one year. As a homeowner, you can qualify for this deduction on the interest paid for the first $750,000 of a qualified personal residence loan on a primary or secondary home.
To get the amount of interest you paid on your loan per year, ask for Form 1098 from your mortgage lender.
Property Tax Deduction
As a homeowner, you know you’re also required to pay taxes for your property. The amount you pay as property tax varies depending on your state, county, and also your property’s market value. You pay property taxes to facilitate the development of local infrastructures, such as highway construction, education, and many others.
This deduction allows you to get exemptions for the property taxes you pay each year if you itemize your taxes. If you’re married and jointly filing this claim, you’re eligible for up to $10,000 deductions in property taxes per year.
On the other hand, single filers can deduct up to $5,000 in property taxes.
Medical Improvement Deduction
Some homeowners make several home improvements or upgrades for medical reasons. Such home improvements include adding ramps, installing a lift, installing handrails, widening your doorways, and many more. If you’re one of these homeowners, you qualify for medical improvement deductions.
To qualify for this deduction, you need to meet the main requirement which is that you need to provide proof that you added these upgrades because of a medical reason. For example, it could be because a member of your family needs them.
Like most deductions, you need to itemize your taxes. You file your claim on Schedule A of Form 1040. You can only claim this deduction for expenses that surpass your gross income by 10%. If the medical improvement has increased your home’s value, you’ll have to subtract the value increase from the amount you’re claiming.
Let’s say you spend $15,000 installing ramps to your home which increases your home’s value by $8,000. In this case, you can only deduct $7,000, which is $15,000 minus $8,000.
Computing this deduction can get a bit complicated. Talk to your tax specialist so that you can understand which of the improvements make you eligible for this deduction and how much you can claim for each upgrade.
Homeownership comes with many rewards. Not only do you create a real estate investment for the future, but also create an opportunity for you to tap into your home’s equity in the future. Is home insurance tax deductible? While it might not be, you can receive various tax deductions by reducing the amount of property taxes you’re supposed to pay.
Some of these deductions include mortgage points, rental property, home office, energy-efficiency improvements, and medical improvements, among many others. Always consult your accountant or tax specialist to establish whether you’re eligible for these tax deductions and how much you can claim.
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