Homeowners generally can only deduct losses experienced from disasters; however, taxpayers using their property for business may be eligible to use both the $100 subtraction rule and 10%-of-AGI rule.
When an insurance or other reimbursement surpasses the cost or adjusted basis of your property, you should usually report this income on your tax return.
Deductible Premiums
Like its counterparts for homeowners or car insurance policies, flood insurance deductibles represent out-of-pocket expenses that must be met before your insurer will begin paying claims. The higher the deductible is set, the lower will be your premiums.
Your client may qualify to claim the cost of their National Flood Insurance Policy as a tax deduction if they use their home office for business. In order to do so, they must meet IRS criteria for qualifying expenses associated with home offices as well as possess an NFIP policy with both building and contents coverage.
Contrary to homeowner and auto policies, which are fully tax deductible, you can only deduct that portion of an NFIP flood policy associated with casualty losses such as flooding. This is due to its classification as a disaster while normal wear-and-tear on homes is not.
One way the National Flood Insurance Program expanded their offering of deductible options was by increasing its maximum deductible from $2,000 to $10,000 on April 1, 2015. This move was meant to attract new customers and boost take-up rates since Biggert-Waters implementation.
But while this move may have had an impact on NFIP policies, another factor could explain why more people are searching for information on this subject. According to Google Trends, April 1 saw the third highest spike in search interest for “flood insurance deductible.”
As an agent, your clients will benefit from understanding the impact of these variables so they can make an informed decision based on their particular circumstances. Furthermore, you can provide information on available discounts such as raising their deductible or undertaking mitigation projects such as elevating utilities or installing flood openings – these discounts could save them money on their NFIP flood insurance premiums!
Deductible Losses
Flood insurance deductibles are similar to homeowners and renters insurance in that you must make payments out of pocket before your insurer starts making payments on any losses you experience. They depend on how much coverage you have and your location – to find out exactly how much the deductible for your specific policy costs, speak with your insurer or visit NFIP (Federal Emergency Management Agency) website which offers average cost and deductible figures in your area.
After experiencing flooding, it’s crucial that you file an insurance claim immediately to cover losses and potentially receive reimbursement of some or all damage done. Such reimbursement must be reported as income on your tax return.
However, if the loss was due to a federally declared disaster, you can write off all unreimbursed losses as casualty losses and write them off as such. The rules for casualty losses are similar to other forms of property insurance policy with exception of timeframe and item being lost or destroyed being separate factors.
Your building type also impacts how much flood insurance premiums should cost you. In general, older or high-risk houses typically carry higher premiums compared to newer or lower-risk properties; however, modern construction techniques with floor openings that facilitate water drainage can lower this risk significantly. Furthermore, using the National Flood Insurance Program’s maps as a guideline, you can determine if your house falls within high or low flood risks zones.
If your building serves both business and residence purposes, all insurance costs incurred for its business portion must be reported as rental expenses in the year they were paid since these expenses are associated with rental activity that generates taxable income.
Deductible Rental Expenses
As a property owner, you can deduct your landlord insurance premium as an operating expense – just like any other real estate-related expenses, such as homeowners or hazard insurance policies that you carry on the property, according to NerdWallet. Furthermore, landlords can deduct actual losses from flood damage that were not reimbursed by insurance providers as operating expenses.
As part of your rental property business, in addition to insurance costs you may also deduct expenses related to renting out properties, including supplies specifically used for managing them and fees incurred when applying for permission to rent them out (local licensing fees or occupancy taxes). Utility bills paid on renters’ behalf and property taxes owed are also tax deductible when paid by landlords; additionally any fees related to showing and collecting rent can also be written off, along with professional expenses like attorney fees for evicting tenants can also be written off as expenses related to running their rental business.
If you use part of your home for rental-related business use and meet IRS criteria, claiming a home office deduction could be possible. By keeping records on how much of it was utilized for this purpose and writing off expenses related to maintaining this space (including landlord insurance premiums).
As part of your calculations for building and contents coverage needs, consider the value of your possessions. A home inventory can give you an accurate assessment of their worth; then an insurance agent can assist in calculating an appropriate total value coverage amount to provide adequate protection.
Never overlook your location’s flood risk. The National Flood Insurance Program’s risk map can give an idea of potential flooding problems in your area; however, you should consult an insurance agent in order to be certain you have enough protection in place.
Your flood policy’s deductible amount can depend on both the provider and situation, but should always be an amount that fits within your financial means should a claim arise. NerdWallet’s calculator can help determine an average deductible amount in your situation and state.
Deductible Business Expenses
Flood insurance premiums, unlike homeowner’s insurance which is generally tax-deductible as an itemized deduction, are not tax-deductible. If your home is used for business, however, then flood premiums may be deducted just like any other business expense. Furthermore, should it be destroyed by a hurricane or natural disaster designated a federal disaster area, federal assistance through FEMA may be provided as funds can help cover replacement expenses of lost items.
Flood insurance payouts are only considered taxable if they exceed what you originally paid for the property, such as your insurance deductible or depreciation costs if you have actual cash value coverage. Assuming, for instance, that a flood caused by a federally declared disaster damaged your car at a repair cost of $950 but had a $100 deductible on comprehensive insurance; any reimbursement from insurance would fall short of its actual cash value prior to flooding and should therefore not be reported as income.
Flood insurance policies can be purchased through both the National Flood Insurance Program (NFIP) and private companies, so it’s essential to understand their differences before purchasing one. The NFIP offers both building and contents coverage; building coverage covers your structure itself; while contents coverage protects items like furniture and appliances found inside your home. Likewise, reimbursement under this program only extends up to $250,000 while private insurers might have higher limits of coverage.
Flood insurance policies may not be mandatory under law, but mortgage lenders often stipulate it as a condition of their loans if residences in areas susceptible to moderate or high flood risks are located there. As such, it’s a good idea to review any mortgage documents carefully for compliance with any stipulations related to flood insurance stipulations; furthermore if you own rental properties you can deduct premium payments as business expenses.
