If you were hoping that your homeowners insurance is tax deductible, sorry to break the bad news. There are some instances when you can deduct homeowners insurance – and we’ll get to those in a second – but generally speaking homeowners insurance doesn’t qualify as a federal income tax deduction.
Okay, now for those exceptions (but please check with your tax pro or the IRS to see if they apply to your particular situation).
If your home is damaged due to perils, you can deduct the losses, but only after first reducing the amount of the loss by any insurance reimbursement received plus $100, then further reducing the loss by 10% of your adjusted gross income. Before you drag out your calculator, check your homeowners’ policy to see how it defines perils.
If you own a home that you derive income from as a rental, you can deduct the homeowners’ insurance as a business expense on your Schedule C tax form.
If you operate a business out of your home, a portion of your homeowners’ or renters’ insurance premiums is a Schedule C tax deduction, equivalent to the percentage of the business use of your home. Note that any additional business coverage you carry (like liability or coverage on equipment) is a direct expense that can be deducted elsewhere on your return.
There is another instance that applies to homeowner insurance deductions – the PMI (private mortgage insurance) tax deduction. Sometime late in 2007, the U.S. Congress granted a tax deduction to homeowners who were paying private mortgage insurance. That deduction has been extended through 2010. Typically, PMI insurance is required by a lender if you put less than 20% down on your home purchase. It’s designed to protect the lender if you default on your home loan (a lot of that going around these days). If your lender has to sell the property to pay the mortgage, the PMI covers the difference between what the home sells for and the actual loan amount due. PMI is an add-on to your monthly mortgage payment and the first year’s worth is usually paid up front at closing, after that it’s assessed monthly. Depending on the type of home loan you get, PMI ranges between 0.50% and 0.75% of your loan amount. So if your home loan is $400,000 and your PMI rate is 0.50%, you’re paying $800 a year PMI. Multiply that by your tax bracket, and that’s what you can deduct.
Keep in mind that the PMI deduction applies only to home loans made in 2007 or after. And there are limits on the deduction depending on your adjusted gross income. If you think you qualify for this type of homeowners’ tax deduction, check with your professional tax preparer or the IRS.