Owning a home comes with various responsibilities, one of which is ensuring that the property is adequately insured. A common term you might encounter is "hazard insurance." But what exactly is hazard insurance, and how does it differ from homeowners insurance?
Moreover, can you claim hazard insurance deductions on your taxes?
Hazard insurance refers to the portion of your homeowners insurance policy that protects your house from physical damage caused by specific perils such as fire, hail, windstorms, vandalism, or theft. It's important to note that hazard insurance is usually not a separate, standalone policy.
Instead, it is a term often used by mortgage lenders to describe the coverage within a homeowners policy that protects the physical structure of a house.
However, standard homeowners insurance policies typically exclude coverage for major natural disasters like flooding and earthquakes, requiring additional or separate insurance policies for those events.
Whether you can deduct hazard insurance on your taxes depends on how you use the property. Here are some common scenarios:
Primary Residence
For most homeowners, hazard insurance premiums for your primary residence are not deductible on your tax return. The IRS generally considers these premiums to be personal expenses.
Business Use of Home
If you use part of your home for business, you may be able to deduct a portion of your hazard insurance premium. The deductible amount is proportional to the percentage of your home’s square footage used for business purposes.
For example, if you use 10% of your home exclusively for your business, you might be able to deduct 10% of your hazard insurance premium. Detailed records and IRS Form 8829 can help determine allowable expenses for the business use of your home.
Rental Property
Hazard insurance premiums for rental properties are typically considered business expenses and are generally deductible. You can claim these deductions on IRS Schedule E, which covers supplemental income and loss from rental real estate. Ensure you keep all receipts and documentation related to your rental property, including hazard insurance policies and payments.
Federally Declared Disaster
If your primary residence is impacted by a federally declared disaster, you may be able to deduct casualty and theft losses not covered by insurance. This includes out-of-pocket expenses resulting from earthquakes, floods, or wildfires. To claim this deduction, file IRS Schedule A (Form 1040) for itemized deductions.
Consulting a tax professional can help determine your eligibility for these deductions and ensure compliance with tax laws.
While hazard insurance covers many risks, it may exclude certain perils, especially in high-risk areas. Common exclusions include:
- Floods: Standard policies do not cover flood damage, requiring separate flood insurance.
- Earthquakes: Earthquake damage is typically excluded, necessitating additional coverage.
- Government Action: Damage from actions by government authorities is not covered.
- Acts of War: War or terrorism-related damages are excluded.
Standard homeowners policies generally cover damage from strong winds, including hurricanes. However, depending on your location, you might need policy modifications or a separate deductible for wind and hail damage.
Similarly, coverage for wildfires varies based on your home's location, with higher rates or separate deductibles possible in wildfire-prone areas.
In areas prone to specific disasters, you might need additional coverage, often referred to as catastrophe insurance. This standalone policy covers specific types of disasters, including those caused by humans.
Other common exclusions in homeowners insurance policies include:
- Pest infestations
- Mold or wet rot
- Certain dog breeds
- Wear and tear or neglect
- Power surges from your utility company
- Home-based business liability
- Local building ordinance or law
- Intentional damage
- Nuclear hazards
Conclusion
Understanding hazard insurance is crucial for homeowners to ensure they have adequate protection and to know their tax options. While hazard insurance is typically part of a homeowners policy, knowing what it covers—and what it doesn’t—can help you make informed decisions about additional coverage.
For tax-related questions, consulting with a tax professional is always a wise choice to maximize your deductions and stay compliant with regulations.
We've been helping customers afford the home of their dreams for many years and we love what we do.
Won Loan, LLC
Company NMLS: 2448154
www.nmlsconsumeraccess.org
Powered By LenderHomePage.com
Won Loan strives to ensure that its services are accessible to people with disabilities. Won Loan has invested a significant amount of resources to help ensure that its website is made easier to use and more accessible for people with disabilities, with the strong belief that every person has the right to live with dignity, equality, comfort and independence.
Won Loan makes available the UserWay Website Accessibility Widget that is powered by a dedicated accessibility server. The software allows wonloan.com to improve its compliance with the Web Content Accessibility Guidelines (WCAG 2.1).
Won Loan accessibility menu can be enabled by clicking the accessibility menu icon that appears on the corner on the page. After triggering the accessibility menu, please wait a moment for the accessibility menu to load in its entirety.
Won Loan continues its efforts to constantly improve the accessibility of its site and services in the belief that it is our collective moral obligation to allow seamless, accessible and unhindered use also for those of us with disabilities.
Despite our efforts to make all pages and content on Won Loan website fully accessible, some content may not have yet been fully adapted to the strictest accessibility standards. This may be a result of not having found or identified the most appropriate technological solution.
If you are experiencing difficulty with any content on Won Loan website or require assistance with any part of our site, please contact us during normal business hours as detailed below and we will be happy to assist.
If you wish to report an accessibility issue, have any questions or need assistance, please contact us by sending an email to: dakota@wonloan.com