In addition to being a difficult experience all over, the past two years raise some important questions about tax returns and insurance. One of them is of special interest to our clients, so I thought it would be useful to address it here, as I am sure that there are plenty of other people wondering the same thing – by the looks of it, yourself included. So let’s get right down to it – is homeowners insurance tax deductible in 2021? Can you deduct homeowners insurance on taxes? Does remote working turn our premiums into business expenses?
The short answer is – it depends. Before I explain how you can (partially) make your homeowners insurance tax deductible in 2021, let’s firstly address a key distinction.
Homeowners Insurance vs. Mortgage (PMI) Insurance Tax Deductions
Homeowners insurance is defined as a form of property insurance that protects against damages caused to one’s residence, whereas mortgage insurance is coverage that safeguards the mortgage lender against the possible default of the borrower. Essentially, one protects your home, while the other protects the financial institution that enabled you to buy it.
Why is this distinction important? Many people assume that because mortgage insurance is deductible on their federal tax return, the same can be said about home insurance. In truth, the Internal Revenue Service (IRS) does not recognize the latter as a deductible expense. This means that, as a rule of thumb, you can’t really get a tax break from your homeowner insurance policy.
This being said, there are some exceptions to the rule, and one in particular is highly relevant to the work from home environment of 2021.
Are Homeowners Insurance Premiums Tax Deductible?
There are two main circumstances that can accommodate homeowners insurance tax deductions: insurance costs on rental properties and working from home.
Homeowners Insurance Tax Deductions for Rental Properties
You can deduct homeowners insurance premiums paid for rental properties on your federal tax returns, as the compensation you receive for renting is considered a form of business income. Keep in mind that if you rent just a portion of your house, the deduction will have to be adjusted accordingly.
For example, if you rent a room that accounts for 20% of the total square footage of your home, you can then deduct 20% of your insurance premiums. If you are a landlord and rent an entire apartment, you can deduct the homeowners insurance in its entirety.
Homeowners Insurance Tax Deductions When You Work From Home
Working from home usually allows for wiggle room in terms of tax deductions. While some types of businesses, such as daycares, may require additional commercial insurance policies, homeowners are allowed to partially deduct the insurance costs of their offices when working from home. This is particularly relevant now, when remote work has become the new norm, and everyone had to either improvise or rediscover their long-forgotten living room desks.
This basically means that you can partially write off your home insurance premiums in your tax return form. Make sure to use the same rule of proportionality you would apply if you rented your house: if your office accounts for 20% of your home’s square footage, you can deduct 20% of the premiums. Note that not every room with a desk qualifies for this deduction – it is imperative that you actually use that area for work.
If both you and your spouse have worked from home in 2020, your tax deductions can be substantial.
The Bottom Line
Make sure to discuss this with your tax professional. They will identify the particularities of your situation, and ultimately help you benefit from this encouraging form of homeowners insurance tax deduction.
Or, you can simply drop me a line and I can see you through this process myself. At Williams, our independent insurance agents in Franklin, TN make it their priority to answer each and every question you may have. We’ll help you find the best home insurance in Tennessee, so don’t hesitate to get in touch!