Are Homeowners Insurance Premiums Tax-Deductible?

A home is a valuable asset, so it only makes sense to protect it with insurance.

Like many homeowners, you might pay home insurance through an escrow account. In which case, you’ll include premiums with your mortgage payment. But although homeowners insurance serves to your advantage, it’s an added expense.

The good news is that you can deduct certain items to help offset the cost of ownership. Does this include your homeowners insurance premiums?

Here’s what you need to know about tax deductions and homeowners insurance, but first: How does home insurance work?

What’s the Benefit of Homeowners Insurance?

Homeowners insurance is a policy designed to protect your property against a range of perils.

For example:

• Windstorms
• Fire
• Vandalism
• Theft
• Explosion
• Damage by aircraft or vehicle

In total, many home insurance policies cover 16 named perils. But while policies offer a lot of protections, they don’t cover everything.

A standard homeowners insurance policy doesn’t cover earthquakes or floods. So you’ll need a separate policy for both. And depending on where you live, your policy might limit coverage for windstorms. If so, you’ll need to buy additional coverage, too.

Homeowners insurance premiums vary depending on where you live. Factors that determine your rate include:

• Age and condition of the property
• Local crime rates
• Square footage of the property
• Amount of coverage
• Claims history
• Number of insurance riders

Standard homeowners insurance policies offer four types of protection.

1. Dwelling coverage

This is the most important part of your policy. It covers your actual structure or home, as well as other structures. As a general rule of thumb, you need enough dwelling coverage to completely rebuild your home.

Coverage for other structures is 10 percent of your dwelling coverage. Others structures include a fence, detached garage, shed, or pool.

2. Personal property coverage

This part of your policy protects your personal belongings—inside and outside of the home.

Coverage for personal property is typically 50 percent to 70 percent of dwelling coverage. Items covered include:

• Furniture
• Electronics
• Clothes
• Jewelry
• Artwork
• Musical instruments
• Collectibles

Keep in mind, most policies limit coverage on certain belongings. So it’s important to understand how your policy works. For example, your policy might cover jewelry up to $1,500 or $3,000 per item. If you own high-value items, you’ll likely need to buy additional coverage.

3. Loss of use coverage

Homeowners insurance also provides loss of use protection. If your home becomes uninhabitable after a covered peril, this part of your policy pays your additional living expenses.

You’re reimbursed for rentals, hotel stays, and even restaurant meals. Loss of use coverage is 20 percent of dwelling coverage.

4. Liability protection

You’re also protected against injuries that take place on your property. This part of your policy covers an injured party‘s medical bills and court-ordered awards.

Standard policies typically include $100,000 of liability protection, with the option to increase your protection.

You can get a policy with $300,000 or $500,000 of liability. Or, you buy an umbrella policy up to $1 million.

This part of your policy also covers damage you cause to another person’s personal property.

Can You Deduct Homeowners Insurance Premiums?

As a homeowner, you’re eligible for several deductions to reduce your taxable income. This can result in a larger tax refund, or reduce what you owe in federal or state income tax.

On average, you can expect to pay between $1,000 and $3,000 a year for home insurance. For example, according to Insure.com the average annual cost of homeowners insurance nationally for a policy with $300,000 coverage and $1,000 deductible is $2,540.

But although insurance is a typical homeowners expense, it’s typically “not” tax deductible. So unfortunately, you can’t write off homeowners insurance premiums on your taxes (under normal circumstances).

There is an exception, though.

When Can You Deduct Homeowners Insurance?

The only time you’re able to deduct homeowners insurance is when the policy covers a rental property.

In this scenario, your home insurance premium becomes a business expense. And like other business expenses, you can write off certain costs to reduce your tax liability.

But the ability to write off premiums isn’t one-size-fits-all. It depends on how you rent out the property.

For example, if you’re only renting a room or basement apartment attached to the property, you’re only eligible to write off a portion of your homeowners insurance premium.

This is because you’re only using a portion of the property as a rental.

But if you rent out the entire property—meaning it’s not your personal residence—you’re able to write off 100 percent of your premiums paid in that year.

What to Know About Homeowners Insurance Deductibles?

Homeowners insurance also involves deductibles.

When filing a claim, you’re required to pay your deductible out-of-pocket. Only then will your insurance provider pay a claim.

Deductibles can be as low as $500, or as high as $1,000 or $2,500. Generally speaking, the lower your deductible, the higher your insurance premium.

Types of Homeowner Deductions

Even though the average homeowner can’t write off their home insurance premiums, you can save money in other ways. Here are other tax deductions available to homeowners.

1. Mortgage points

If you buy mortgage points (or discount points) to reduce your mortgage rate, in most cases you’re able to deduct the full amount in the year you buy the house.

Each mortgage point costs about 1 percent of the mortgage amount and reduces your interest rate by .25%.

To illustrate, let’s say you’re buying a $300,000 house and paying two mortgage points. In this case, you might pay $6,000 to reduce your mortgage rate from 3.5% to 3.0%.

Mortgage points are included with your closing costs, so it’ll increase your out-of-pocket expense at closing.

2. Mortgage interest deduction

Similarly, you’re able to write off mortgage interest paid on your primary residence or second home—up to the first $750,000. This tax break can potentially save thousands.

3. Property tax deduction

Property taxes are another big monthly expense with homeownership. The good news, though, is that you can also write off this cost when filing your taxes.

Couples filing a joint return can deduct up to $10,000 in property taxes per year. You can deduct up to $5,000 if you’re single or married filing separately.

4. Home office deduction

Are you self-employed and work from home? If so, you might be eligible to write off your home office.

For this to work, you must have a dedicated work space, and you must be self-employed.
This deduction doesn’t currently apply to remote workers.

Not only can you deduct the actual space, you can also deduct other household expenses. This includes a portion of your utilities and Internet.

5. Home improvement deduction

If you’ve completed projects or renovations to improve your home, make sure you keep your receipts.

Unfortunately, you can’t deduct the cost of improvements in the year you make them. But you can deduct the total cost in the year you sell the house.

Not every improvement is eligible for a deduction, though. So you’ll need to consult a tax preparer for guidance. Home improvements that might qualify include additions, a new HVAC system, a swimming pool, and others.

6. Energy-efficiency tax credit

Although this isn’t a deduction, it can result in a big tax break.

If you complete certain energy-efficient upgrades to your home—such as installing a solar powered water heater, a geothermal heat pump, or solar panels—you might qualify for a tax credit equal to 30 percent of the upgrade cost.

Credits are different from deductions, though. A tax deduction lowers your taxable income whereas a tax credit reduces your tax liability dollar-for-dollar.

7. Rental property

As a landlord you’re responsible to pay taxes on your rental income. The good news is that you can write off expenses incurred with maintaining your rental.

Along with homeowners insurance premiums, you’re able to write off maintenance, repairs, and utilities associated with the property.

As a side note, you must itemize your tax return to take advantage of homeowner tax deductions. Just know that itemizing doesn’t make sense for everyone.

Typically, you only need to itemize when your allowable itemize deductions are larger than your standard deduction.

For the 2021 tax year, the standard deduction for married couples filing jointly is $25,100; $12,550 for single filers and married couples filing separately; and $18,800 for heads of households.

Conclusion

Owning a home isn’t without expenses. Not only the monthly payment, but also other expenses such as insurance, utilities, and maintenance.

Fortunately, the ability to write off certain expenses can offset the cost of homeownership. This allows you to keep more money in your pocket. But it’s important to understand what you can and can’t deduct. If you have any questions, speak with your tax preparer.