Buying a home is often a complicated process, and by the time you get the keys in your hand, you’ve likely spent months thinking about things like mortgages, interest rates, and closing costs; you’ve lost count of how many hours you’ve spent reading and filling out loan applications and all you want to do is move in and start enjoying your new home. Many people don’t realize that buying a home also causes a lot of changes to their tax situation as well.

Prior to 2017, the government offered a tax break on mortgage interest as an incentive to potential home buyers. This allowed homeowners who itemized their deductions to write off some of the cost of their mortgage interest. You may also qualify to deduct mortgage interest paid as part of the settlement as long as the mortgage interest is listed in a statement provided by the lender. Other costs associated with buying a home, including property taxes, and estate taxes may also be tax deductible. If you would like more information on specific tax deductions you may qualify for, you can check IRS Publication 530 for more details or ask your tax professional.

While a detailed explanation of all the potential tax deductions associated with buying a home is beyond the scope of this article, we will answer one question many new homeowners have: is my homeowners insurance tax deductible?

Is My Homeowners Insurance Tax Deductible?

In most cases, the answer is no. According to the Internal Revenue Service, premiums for insurance are non-deductible expenses because most people generally only use their home for personal use. Therefore, payments for insurance, including payments for fire, comprehensive coverage(such as earthquake or flood coverage), and title insurance cannot be itemized on your tax return. Property losses, even if they are covered by the insurance, are also not eligible for deduction. However, there are a few cases in which you are allowed to deduct insurance premiums from your federal taxes.

Deducting Premiums for a Home Office

If you have allocated space inside your home for a home office, you can deduct the same percentage of your insurance premiums from your taxes that you deduct for household expenses. For example, if you deduct 10% of your household expenses for a home office, you can also deduct 10% of your premiums as long as the workplace qualifies for a home office deduction. Keep in mind that the nature of your business may require additional coverage that may or may not be eligible for tax deductions. Your tax professional or insurance agent can help you determine if your home office qualifies for a deduction.

Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is meant to protect the lender from losses incurred when the borrower defaults on the loan. This type of insurance is often required for mortgage loans provided by government assistance programs or third-party lenders. Many people trying to buy a home find that they can’t afford the down payment or are unable to qualify for a traditional mortgage loan due to bad credit or low income; but they may qualify for assistance from either a government agency or lenders that provide specialized loans or financing for people in these situations. However, these types of loans pose a higher risk of default by the borrower and because of this, most of these loans require the buyer to purchase private mortgage insurance that protects the lender if the borrower fails to repay the loan.

In order to deduct your private mortgage insurance premiums from your taxes, your loan contract must have been issued after 2006 and your adjusted gross income listed on Form 1040 cannot be higher than $54,500 (or $109,000 for married couples filing jointly).

Insurance Premiums for Rental Properties

If you use part of your home as a rental property, a portion of your insurance premiums can be deducted from your taxes because the cost of those premiums is considered a business expense. The percentage of those premiums that are tax deductible depends on the rental property.

If you rent out only the basement apartment of your home, only a portion of your premium would be considered a business expense. However, if you own and rent a separate property that is not connected to your personal residence, then 100% of the insurance policy covering the rental property is tax deductible.

Landlords may also be able to deduct the cost of other insurance policies related to their rental properties regardless of whether the policies also cover their personal residence. Your tax professional will be able to determine if your policy qualifies and make sure you are getting the appropriate tax deductions for your specific situation.

Deducting Property Losses

In most cases, property losses are not tax deductible, even if they are covered under the insurance policy. However, there is one exception to this rule and it applies to losses incurred in a federally declared disaster. For example, areas impacted by the California wildfires, Hurricane Harvey and Hurricane Irma were all declared federal disaster areas. Homeowners who suffered property losses in those areas became eligible for tax deductions to cover financial losses that were not covered by their insurer.

Say you are a homeowner in a federal disaster area and you suffered $15,000 in property losses but your insurance company only reimburses you for $5,000. The remaining $10,000 can be deducted from your federal tax return as long as you itemize your deductions. You may also be able to deduct your insurance premium and depreciation depending on what type of coverage is included in your policy.

The process of purchasing a home can be stressful, and making sense of all the fine print and complicated details associated with that purchase can become tiring. That said, understanding your options with regard to your homeowners insurance can ensure that you have one less thing to worry about as you begin your journey as a homeowner.

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