Q

Is homeowners insurance tax-deductible in 2020?

A

In most cases, you can’t deduct homeowners insurance premiums from your taxes. However, you may be able to claim a deduction if you work from home or you’re a landlord and rent out the home.

Pat Howard 1600

Pat Howard

Published February 13, 2020

KEY TAKEAWAYS

  • You generally can’t deduct homeowners insurance premiums from your taxes if the home is your primary residence

  • If you use a room as a home office, you may be able to deduct a portion of your premiums equal to the room’s proportion to the rest of the residence

  • If you rent out a home or condo as a landlord, you may be able to claim a deduction on your insurance premiums as long as you don’t live in the residence

  • If your home or personal property are damaged and it’s either not covered or you’re not fully reimbursed by insurance, you may be able to claim a casualty-loss deduction

Like most insurance types, you pay for homeowners insurance with premiums — the amount you pay out to your insurance company to keep your home protected. But under most circumstances, you cannot deduct your homeowners insurance premiums from your taxes.

However, depending on how you use the home — say, if you work from home or you’re a landlord and you rent out the home — you may be able to claim a deduction on your insurance premiums. There are a few other home-related deductions that you may be able to itemize on your tax return — namely the mortgage interest deduction, property tax deduction, home office deduction, and energy efficiency deduction.

You also may be able to receive a tax deduction if your home or personal property incurred a loss or damage not covered by homeowners insurance or insured losses that you weren’t fully reimbursed for; flood and earthquake losses are one of many uninsured losses you can potentially claim on your taxes to reduce your taxable income. In order to claim a casualty-loss deduction, you need to meet certain criteria that we’ll touch on shortly.

In this article:

What is a tax deduction?

Every year, you pay taxes on your taxable income — your salary, wages, or tips — and your tax burden is a percentage of your taxable income within your tax bracket.

When you claim tax deductions, you’re not subtracting the deducted amount from your taxes; you’re simply reporting less income than you were thought to earn. If you earn $60,000 a year, and you claim $3,000 in tax deductions, that doesn’t mean you get to pay $3,000 less in taxes, but that you only pay taxes on $57,000 in income.

For some types of insurance — namely life insurance and disability insurance, you can’t deduct insurance premiums from your taxes. You can claim deductions for health insurance (if it’s paid for with after-tax dollars) as well as renters insurance if it qualifies as a business expense.

Homeowners insurance is similar to renters insurance in that regard — the amount you pay in premiums and deductibles can be deducted if you rent out your home, and you can get a break on your premiums if you work from home. There are also extenuating circumstances where you can claim home and personal property casualty and theft losses as an itemized deduction on your tax return if your insurer denies you coverage or if you’re not fully reimbursed for a loss.

Tax deductions for renting out your home

If you invest in real estate and rent out your home, you can deduct the rental property’s homeowners or condo insurance from your taxes. That’s because renting out a home is considered work — the income you generate is taxable — and thus, spending money on a rental property would count as a business expense, even if that expense is homeowners or condo insurance.

At tax time, you file a Schedule E (Supplemental Income and Loss) form, where you provide how much rent you collected that year and whether or not the home is your primary residence (for tax reasons, its best if it isn’t), and if so, for how long.

Tax deductions if you work from home

If you work from home, you may be able to deduct a portion of your homeowners insurance premiums from your taxes. The amount you deduct is calculated by determining what percentage of your home (in square footage) is used for business. If 15% of your house’s square footage is used for work, then 15% of the amount you paid in premiums for the year would be deducted from your taxable income.

However, certain conditions must be met, otherwise you could easily write off every desk and swivel chair you own. In order for deduction criteria to be met, your workstation must be in a condensed, specified area of the home.

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Tax breaks for claims insurers won’t fully cover

If your home is damaged and your homeowners insurance claim is denied, you may not be totally out of luck, but only if you deduct it as a casualty loss — a deduction of the affected property’s current value or the adjusted basis of your property (whichever is lesser) — on your tax return. Same goes for personal property: If an insurer denies a personal property claim you made for the expensive speaker system you recently installed, you can deduct it using IRS Form 1040, Schedule A — the IRS form for listing itemized deductions.

But there’s one important caveat you should be aware of — recent changes to the tax law have drastically limited who is able to claim a casualty-loss deduction. Tax reform legislation passed a couple of years back — the Tax Cuts and Jobs Act of 2017 — made it so you can only claim a casualty-loss deduction if the property loss occurred in a federally declared disaster area (a disaster that occurs in an area declared by the president to be eligible for federal relief or assistance).

What to know about deducting losses

A loss is any circumstance where your property or assets lose value. When your homeowners insurance denies you coverage on something that had value, you incur a loss; to the IRS, whatever was stolen or damaged is a depreciated asset that the taxpayer had to pay out of pocket to cover.

In the event of a loss, it pays to be tax savvy, and there are a few important rules and nuances you must meet and be cognizant of in order to get what you’re properly owed.

First, in order to receive a deduction on a loss — home, personal belongings, or otherwise — you must file a claim with your home insurance company in a timely manner, in most cases within 30 days of the incident. The property damage or theft must also occur in a federally declared disaster area in order to qualify as tax-deductible. Only then can you deduct the denied claim amount from your taxes.

There’s also quite a bit of subtraction to do when you file losses. Each individual loss immediately has $100 taken off the top. From there, 10% of your adjusted gross income is subtracted from the combined loss amount.

For example, if you file itemized losses of $1,000 and $3,000, your loss amounts are actually $900 and $2,900, so $3,800 in total. If your AGI is $35,000, the 10% threshold would be $3,500, meaning you only get to reduce your taxable income by $300.

The exception to this is when you suffer a loss to property used for business, like a rental property. In this case, you’re not required by the IRS to reduce the loss amount by $100, and the 10% of adjusted gross income rules don’t apply.

Tax breaks for damage and theft when coverage is denied

When your home or personal belongings are damaged or destroyed and your insurance company denies your claim on the losses you incurred, you can claim it as a casualty loss on your taxes, but only when your home or property is damaged or destroyed under these conditions, according to the IRS:

  • Sudden and unexpected events — swift, unanticipated, and unintended rather than gradual or progressive
  • Unusual events — not a day-to-day occurrence

Examples of deductible casualty losses are:

  • Earthquakes
  • Floods
  • Fire (non-malicious/unintentional)
  • Government-ordered demolition or relocation of home deemed unsafe to inhabit
  • Mine cave-ins
  • Sonic booms
  • Storms like hurricane and tornadoes
  • Terrorism
  • Vandalism
  • Volcanic eruptions

Non-deductible casualty losses are:

  • Accidentally breaking items under normal circumstances
  • Damage a pet does to your home, which applies if the dog is a puppy or not trained or housebroken, since the damage could be classified as expected and failing to meet casualty loss guidelines
  • Fire you willfully set or you paid someone to set
  • Wear and tear
  • Losses of property because of a drought, in order for it to be deducted, you must have incurred a drought-related loss in a trade or business (like farming), or a transaction entered into for profit.
  • Termite or moth damage
  • Damage or destruction of trees, shrubs, and other plants because of fungus, disease, or insect infestation. Although sudden destruction of a tree or plant due to an unexpected or unusual infestation could be classified as a casualty loss

Tax breaks for damage and theft when coverage is accepted

Victims of theft or casualty losses can also claim a deduction when they receive an insurance payment that doesn’t cover the entire loss. To better illustrate, if you receive a home insurance payment or reimbursement that’s less than your property’s property’s current value at the time that it's damaged, destroyed, or stolen, you can deduct the difference from your taxes.

If that antique urn that was stolen from your mantelpiece was worth $6,000, and the insurer paid out $5,000 to cover your losses, you can claim a $1,000 loss on your taxes. On the flip side, if the insurance payment for a loss exceeds the property’s current value, you may have to report that amount as a taxable gain — the amount you make on an asset — on your income taxes.

You can also get deductions on your homeowners insurance deductibles — the amount you pay to an insurer before they pay out a claim — but the $100/10% rule must be met in order to do so. There are also extenuating circumstances where you may be able to add the paid insurance deductible to the amount the insurer didn’t cover on the loss or losses, and deduct that from your taxes.