Owning a home comes with its fair share of expenses. Some of these expenses are tax-deductible, while others are not. Tax-deductible expenses are subtracted from your gross income, which lowers your taxable income. As a homeowner, home insurance premiums are some of the recurring expenses you have to deal with.
So, is your home insurance tax deductible? No, homeowners insurance is not tax-deductible. This means the IRS (Internal Revenue Service) does not classify home insurance as a deductible expense. Even though your premiums may be included in your mortgage, they will not be deducted from your gross income for tax purposes. However, there are a few exceptions that can make your homeowners insurance tax-deductible.
When Is Homeowners Insurance Tax-Deductible?
Homeowners insurance is tax-deductible in two instances:
1. If You Have A Home Office
The cost of your homeowners insurance can be deducted from your gross income for tax purposes if you have a home office. This means that if you run a business from your home, the percentage of expenses allocated to the home office is tax-deductible. This includes the home insurance premium you pay for the home office.
For instance, if 20% of your total home expenses go towards your home business, then that 20% is considered tax-deductible. However, to qualify as a home office, your workspace must be covered under your homeowners insurance policy.
The home office exception will apply to any part of your home or free-standing structure that is devoted to operating your business. This exception will only apply if your home office is the principal place from which you operate your business.
2. If You Are A Landlord
If you receive any rental income from your home, the percentage of homeowners insurance on the rental portion of your property is tax-deductible. If your entire property is used for rental purposes, then the home insurance paid for that property is a tax-deductible expense.
Even if you are only renting out a part of your property such as a spare room or a garage apartment, you will be eligible for tax relief on your homeowners insurance. You will pay taxes on the rental income you receive while the tax-deductible expenses like insurance and repair costs can be recouped.
The tax relief on rental income will also apply if you have more than one rental property. If you are paying homeowners insurance for multiple rental properties, you are eligible to receive tax deductions on all the insured properties.
What Tax Deductions Are Homeowners Eligible For?
Apart from homeowners insurance, there are many other expenses homeowners incur. Fortunately, some of these expenses are tax-deductible, meaning you can claim them when you file your taxes.
Here are the main tax deductions every homeowner should know about.
Your mortgage points are bought upfront at the point of purchasing a mortgage, and one mortgage point is equal to 1% of your mortgage. The purpose of mortgage points is to reduce your interest rate over the duration of the mortgage on your property. You can claim the full amount you pay for your mortgage points as a deductible expense.
For mortgages above $750,000, there is a limit on the amount you can deduct from your taxes. Your mortgage lender will provide you with Form 1098, which you can use to claim your tax deduction.
Property taxes are a tax-deductible expense. You can deduct the property taxes you pay annually from your gross income. However, the property taxes are influenced by a variety of factors including the value of your property, the state where you live, and your particular county.
If you are married and file your property taxes jointly, you are eligible to deduct up to $10,000 in property taxes per year. If you are single or file your taxes individually, the amount you can deduct in property taxes is capped at $5,000.
Your mortgage accrues interest annually. You can claim this interest from your taxes within a year of paying it. However, the total mortgage interest you can claim is limited to the first $750,000. This interest can be on a qualified mortgage on your primary or second home.
Home Improvement Expenses
Any home improvement projects you undertake to add value to your home are eligible for a tax deduction. Capital improvements such as new roofing, a new garage, swimming pool, water heaters, and even home security systems all qualify for tax deductions.
Home improvement expenses can only be claimed at the point of selling your home. It is, therefore, important to maintain records of any capital improvements done to your home. A tax specialist can help you identify which improvements qualify for tax breaks.
If you are thinking of upgrading to energy-efficient fuel sources like solar or wind, the benefits are twofold. One, you get a cleaner and cheaper source of energy, and two, you become eligible for tax breaks. The Residential Renewable Energy tax credit allows you to make claims against any expenses that go towards geothermal, solar, or wind fuel sources for your property.
You can claim energy tax credits for both your primary and secondary properties. Each tax credit entitles you to up to 30% of the cost of the upgrade. For solar, wind, and geothermal energy, there is no limit to the number of tax credits you can claim.
Capital Gains Tax
The Taxpayer Relief Act of 1997 entitles homeowners to tax relief when they decide to sell, provided they meet the stipulations indicated.
If you have owned and lived in your home for at least two years of the last five, you are eligible for a capital gains tax deduction when you sell your home. If you file jointly, you will be exempt from paying any capital gains tax for home profits of up to $500,000. For people who file as individuals, the exemption is capped at $250,000.
Medical Home Improvement Expenses
Wheelchair ramps, handrails, elevators, and any kind of improvements done for medical purposes in your home qualify for a tax deduction. To qualify for this tax break, proof is required to show that you or a member of your household has a medical condition requiring the upgrades.
For medical improvement expenses to be deductible, they need to cost more than 10% of your adjusted gross income. A tax specialist or accountant will be able to advise you on how much you can claim for medical improvement expenses.
Frequently Asked Questions
How Do Tax Deductions Work?
Tax deductions are the expenses you incur during the year that can be deducted from your gross income when filing your taxes. This means that, as a homeowner, you can benefit from certain tax deductions provided the expenses incurred are classified as tax-deductible.
Mortgage interest, property taxes, and capital gains tax are some of the tax-deductible expenses homeowners can claim.
The IRS classifies some expenses as tax-deductible while others are only eligible for deductions in certain conditions. Homeowners insurance, for instance, is not tax-deductible. However, if your property is used, in full or part, for rental or business purposes, then the insurance premium paid is considered a deductible expense.
What Are The Tax Benefits Of Homeownership?
The main tax benefit of homeownership is tax relief on mortgage interest, property tax, capital gains, and rental income (if any). However, these tax deductibles need to meet certain stipulations to qualify. Expenses such as capital gains are tax-deductible; however, they are capped depending on whether you are filing as an individual or jointly.
Can You Deduct Home Insurance On A Rental Property?
Yes, if you are a landlord, you can deduct home insurance on your rental property. Home insurance on rentals is a tax-deductible expense. If you have several rental properties, all the home insurance paid for those properties is tax-deductible.
Is Homeowners Insurance Tax Deductible For A Home Office?
Yes, homeowners insurance is deductible for home office. If you run a business from your home, the percentage of homeowners insurance that covers that part of your property is tax-deductible. However, there are stipulations that govern what qualifies as a home office.
The primary guidelines are that the home office must be covered in your home insurance policy. Your home office should also be the primary point of operation for your business.
Is The Mortgage Interest 100% Tax-Deductible?
Yes, the mortgage interest on your home is 100% tax-deductible. You can deduct 100% of the interest you pay on your mortgage from your gross income for tax purposes. However, your tax claim on mortgage interest will be capped at $750,000.
Homeowners insurance is a valuable protection for any homeowner. It ensures in the case of any damage or loss to your home or property, you can recoup your losses. However, this type of insurance is not eligible for tax deductions save for certain circumstances. However, as a homeowner, there are other tax-deductible expenses you can claim to relieve your tax burden.
Expenses such as the interest on your mortgage, capital gains, and property tax are some of the tax-deductible expenses you can claim. A tax consultant or accountant can help you identify and file all your tax-deductible expenses to ensure you are not missing out on any deductibles.