Summary: Although you can deduct home insurance premiums, it depends on the status of the property. Furthermore, there are other expenses, such as property taxes and closing costs, that may need consideration while filing. As always, tax codes can change and are complex. Working with a licensed professional is always the best course of action. Estimated Read Time: 2 mins
Homeowners insurance premiums are tax-deductible only for rental properties, not for your primary residence. However, it’s important to distinguish between home insurance, which covers property damage, and mortgage insurance, which safeguards against missed mortgage payments.
While mortgage insurance premiums are deductible for both personal and rental properties, there are income restrictions for deducting mortgage insurance premiums on your primary residence.
When you’re looking at anything tax-related, it’s important to look at the full scope of things. This includes property taxes, mortgage insurance, and closing costs.
Below, we explore these possible deductibles but keep in mind that this is not financial advice. Ultimately, speaking with a licensed financial professional is the best way to understand what is and isn’t illegal to deduct from your taxes.
Are Property Taxes Deductible?
You can deduct certain state, local, and foreign taxes, such as income, sales, real estate taxes, and personal property taxes, regardless of business activity. Real property taxes must be uniform and for public welfare, while personal property taxes are based on item value.
However, there’s a combined limit of $10,000—$5,000 if married filing separately—for these taxes, as per the Tax Cuts and Jobs Act (TCJA). Other itemized deductions may also be subject to limitations.
Is Mortgage Insurance Tax Deductible?
There was a time in which private mortgage insurance (PMI) was a tax-deductible item and one day this could change again. However, as of this writing, homeowners can no longer deduct PMI from their taxes. Some exceptions may apply but it’s important to double-check with your financial advisor to learn more.
Are Closing Costs Tax Deductible?
Certain closing costs, like mortgage interest, points, and property taxes, are tax deductible. However, fees such as abstract fees, legal fees, recording fees, title insurance, and credit check fees are not deductible. However, these costs can be added to your home’s cost basis, potentially reducing capital gains taxes upon sale.
When selling your home, you can exclude up to $250,000 if you are single–$500,000 if married—of capital gains from taxation.
If your profit exceeds this threshold, you may owe capital gains taxes, but adding closing costs and improvement expenses can lower the taxable gain.
Closing costs can be deducted in the year of closing if you itemize your taxes. Mortgage points can be deducted upfront or spread over the mortgage’s life, subject to IRS rules. Refinancing may involve similar deductible costs, such as prepaid property taxes and interest points.
Cash-out refinancing proceeds used for home improvements can adjust the home’s cost basis, potentially reducing future capital gains taxes.
The deductibility of private mortgage insurance or mortgage insurance premiums (MIP) depends on the tax year and loan type, as Congress can change their deductibility.
Sources:
1. Topic no. 503, Deductible taxes, IRS. Accessed February 2024. https://www.irs.gov/taxtopics/tc503
2. Tax Cuts and Jobs Act: A comparison for businesses, IRS. Accessed February 2024. https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-a-comparison-for-businesses
3. FAQs, Rental Expenses 1, IRS. Accessed February 2024.
https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals/rental-expenses/rental-expenses-1