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Is Homeowners Insurance Tax Deductible?

Whether or not homeowners insurance is tax-deductible depends on the circumstances. In most cases, the Internal Revenue Service (IRS) doesn't consider insurance as a deductible expense. However, there are two special circumstances when the IRS allows homeowners insurance tax deductions: if you have a home business or if you're a landlord.

Here's everything you need to know about tax deductions and homeowners insurance:

What Is a Tax Deduction?

A tax deduction is something that lowers an individual's or company's tax liability by lowering their taxable income. These are certain expenses that the taxpayer incurs during the year that can be subtracted from their gross income to learn how much taxes they owe.

A tax deduction is something that lowers an individual's or company’s tax liability by lowering their taxable income.

When is Homeowners Insurance Deductible?

1. You use part of your home as a business

Do you use your home, or an area within it, as a small business? Homeowners can deduct business expenses from their taxes when they're self-employed homeowners. To qualify for this deduction, you must be self-employed and not just a remote employee.

Homeowners can deduct business expenses from their taxes if they’re self-employed.

You can apply business costs for a tax break using two methods:

  1. The first method calculates the expenses you use for your home business, such as utilities, internet service and maintenance. You should have copies of all bills to document these expenses.
  2. The second method uses your home office's square footage as a percentage of your total home square footage. Using a simple estimate, you'll deduct $5 per square foot of office space. You can apply this percentage to your premium and deduct the resulting amount as a business expense. For example, if your work area is 10x40, or 400 square feet, you'll receive a $2,000 deduction.

2. You're a landlord who receives rental income from your home

You're eligible for a rental tax deduction if you lease part of your home. You can deduct the homeowners insurance for your rental property from your taxes.

When filing taxes, you must complete a 1040 Schedule E to deduct standard home insurance from your rental income.

Other Deductions That Lower Property Tax Rates

The following deductions won't allow you to deduct your home insurance premiums from your final tax bill. These deductions, however, will help to lower your overall tax liability to the IRS.

1. Home Improvement Deductions

The IRS considers renovations that increase your property's value as capital improvements. Although home improvements may increase your property value, you can't deduct these expenses during the same tax year you paid for them. You can deduct them all at once when you sell your home, so keep records of all of your home improvements.

Qualifying home improvement include adding a garage, deck or home addition; installing a new roof, new heating /cooling systems, water heaters and security systems.

2. Property Tax Deductions

Property tax is a real estate tax that the owner of a property pays. According to H&R Block, you can deduct real estate taxes on a property in the year you pay them. Real estate taxes are deductible:

  • Based on your property's value
  • When your community uniformly levies them
  • When the property is used for a governmental or general community purpose
  • When assessed and paid before the end of the tax year.

You can deduct up to $10,000 (or $5,000 if you are married and filing separately) of state and local taxes, including property taxes.

3. Mortgage Points Deductions

According to H&R Block, mortgage points equal 1% of your mortgage interest paid upfront when you receive your mortgage. If you have a home that is worth $400,000, 1% of your total mortgage would equal $4,000.

Mortgage points are also called:

  • Maximum loan charges
  • Loan discounts
  • Loan origination fees

The following fees cannot be deducted:

  • Notary fees
  • Mortgage note preparation
  • Lender's appraisal fee

Your loan's interest rate will decrease for every mortgage point you buy. For instance, if the market interest rate is 5.0%, you can receive a .25% discount rate for each point you purchase. If you buy one point, it could decrease your rate to 4.75%. Speak with an agent, lender or mortgage company about how you can qualify for mortgage points.

4. Mortgage Interest Deductions

According to IRS publication p936, the mortgage interest deduction is available for that tax year. In many cases, you can deduct your entire home mortgage interest. How much you can deduct depends on three things:

  • The date of your mortgage
  • The amount of the mortgage
  • How you use the mortgage proceeds

You may qualify for a tax deduction if you're making monthly mortgage payments on up to two homes. Note: Interest on home equity loans and credit lines are only deductible if the borrowed funds are used to buy, build or improve the taxpayer's main or second home.

To claim a mortgage interest deduction, you must meet the following requirements:

  • Mortgages taken out before Oct. 13, 1987 ("grandfathered debt").
  • Mortgages you or a spouse took out after Oct. 13, 1987, and before December 16, 2017 to buy, build or substantially improve your home ("home acquisition debt"). Mortgages and grandfathered debt must equal $1 million or less in that tax year.
  • Mortgages you or a spouse took out after Dec. 15, 2017, to buy, build or substantially improve your home ("home acquisition debt"). Mortgages and grandfathered debt must equal $1 million or less in that tax year.

You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. Higher limitations ($1 million ($500,000 if married filing separately)) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.

5. Deductions for Private Mortgage Insurance Premiums

You can deduct private mortgage insurance premiums (PMI) as part of your mortgage interest deduction for the tax year.

You can only deduct mortgage insurance premiums when you meet the following requirements:

  • You paid or have accrued premiums on a qualified mortgage insurance contract issued by a financial institution after December 31, 2006.
  • Your mortgage is acquisition debt on a qualified residence (a new mortgage)
  • You itemize your deductions.

When you meet the above criteria, H&R Block says the mortgage insurance premium deduction will be reduced by 10% for each $1,000 of your adjusted gross income (AGI) is more than one of these amounts:

  • $100,000
  • $50,000 if married and filing separately.

It is eliminated if your AGI is more than the following amounts

  • $109,000
  • $54,500 if married and filing separately.

According to the Internal Revenue Service, the itemized deduction for mortgage insurance premiums was recently extended through 2021.

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6. Energy Efficiency Deductions

The IRS allows homeowners to take deductions if they make energy-saving upgrades to their homes. Additionally, the Residential Renewable Energy Tax Credit allows homeowners to claim credits when they install systems such as solar, wind, geothermal and fuel cells. Updates that qualify for these upgrades include wind turbines, solar panels and geothermal pumps.

The IRS allows homeowners to take deductions if they make energy-saving upgrades to their homes.

The Non-Business Energy Property Credit

The non-business energy property credit has a lifetime limit of $500. You can claim 10% of eligible home improvements, excluding labor and installation fees. The IRS distinguishes between two types of upgrades:

  • Qualified energy efficiency improvements - Insulation, storm windows/doors, metal/asphalt roof, etc.
  • Residential energy property expenditures - Central air conditioning, natural gas/propane, hot water boilers, natural gas/oil/propane furnaces, advanced main air circulating fan, biomass fuel stoves, electric heat pumps

According to the IRS, the credit for nonbusiness energy property has been extended through 2021.

The Residential Energy Efficient Property Credit

Homeowners may claim 30% of the cost of alternative energy equipment installed in a home for the following:

  • Fuel cells
  • Geothermal heat
  • Small wind energy
  • Solar electric
  • Solar water heating

This credit has no dollar limit for many property types. You can claim the unused portion the next tax season if the credit exceeds the amount you owe in taxes. See IRS Form 5695, Residential Energy Credits, for details.

7. Deductions for Declined Insurance Claims

Did your insurer refuse to cover your claim for your home's damage? You can consider deducting this amount as a casualty loss. To qualify, casualty losses must be damage caused by sudden, unexpected or unusual events. To qualify for this deduction, you must first file with your homeowners insurance within 30 days.

You can also use this deduction for personal property losses. When an insurance company denies a claim for your personal property or an expensive security system you purchased, you can deduct it using the IRS Form 1040, Schedule A that lists itemized deductions.

Congress has reformed the Tax Cuts and Jobs Acts (TCJA) legislation. Now, you can only take this deduction for property losses if you live in a federally declared disaster area that is eligible for federal relief.

Examples of deductible casualty losses include:

8. Medical Home Improvements Deductions

You may qualify for a deduction if you have to update your home with medical-related additions like elevators, widened doorways, handrails and ramps. To qualify for this tax deduction you must prove that a member of your household has a medical necessity that required the update(s).

The IRS requires you to itemize this deduction on your taxes using the 1040 form's Schedule A. To claim the deduction, the medical home improvements must exceed 10% of your adjusted gross income. If the improvement increases your home's value, you'll have to subtract that figure from the amount you claim.

For instance, if you spend $30,000 to install an elevator in your home, but it increases your home's value by $10,000, you can only deduct $20,000 from your taxes ($30,000 - $10,000).

Get the Homeowners Coverage You Need

Homeowners insurance coverage isn't tax-deductible except under two circumstances: if you use part of your home for a business or if you use your home as a rental property.

You can receive a tax deduction if you purchase mortgage points upfront or by making qualifying improvements to your home. You can also file a casualty loss claim if your home insurance won't cover losses that occurred on your property.

Another way to save money is by comparison shopping for home insurance. You can save you up to 40% on monthly premiums. Let SmartFinancial streamline your shopping process with a free rate quote. Just enter your zip code below and answer a few questions. We'll find you the best policy at the lowest rates.

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