I have an investment property whose insurance carrier is not renewing any policies in my town. The best I could do as a freestanding landlord policy was over $500 more than the current rate. But I could actually get a lower rate with one carrier if I switched my homeowners for my personal home to them as well. But their rate for that (homeowners) policy is over $300 more than I currently pay.
If you simply net out the two sets of numbers I save over $200 by making the switch. The problem is that the insurance on my investment property is a deductible business expense and the insurance on my own home is not. So I could be saving over $200 cash upfront by switching but losing over $500 in deductible expenses, which makes it a very close call, and for that price I’d keep my current homeowners policy.
So the question is: am I entitled to say “the only reason I’m paying this high rate for my homeowners policy is because it’s tied to my rental unit, making the excess cost an effective business expense” or would that not cut it?
Combined billed services are usually still itemized on the invoice and you would only be able to deduct the “business” items.
<non boy scout advise that will get you in trouble if audited>
If you continued claiming a similar deduction for insurance on the rental despite the actual shift in cost you probably will not trip any alarms.
They are two completely separate policies, and are billed separately. The rationale for being able to include the excess cost of the homeowners policy is that I had to buy it in order to get the landlord policy. So the sole and only reason I’m spending an extra $300 is because I need to do it in order to get the investment property covered. But I don’t know what the regs are in this regard.
But I’m not claiming a similar deduction. What I’d like to do is increase my deduction by $300 to cover the additional cost of the homeowners policy. If I did not elect this option, then I would go with the freestanding landlord policy, which would be an even bigger increase of over $500.
The problem I see is not so much the “indirect” factor of the cost, but that it is a personal cost.
Even worse: costs associated with a personal residence are specifically restricted by the tax code in a way that makes them even less deductible than other personal or mixed-use costs.
It’s a personal expense if you consider it an expense for my homeowners policy. If you consider it an expense for my rental unit, then it’s not a personal expense. The rationale for considering it an expense for the rental unit is that the only reason I incurred this additional expense was because it was a requirement of the rental unit landlord policy.
Sorry, I see I was unclear in my prior post. What I meant in saying that they’re two sides of the same coin was in response to your statement in which you distinguished between the “indirect” aspect and the “personal cost” aspect, and ISTM that these two things are two sides of the same coin.
Because the added cost of the homeowners policy is both an indirect investment cost for the investment property and a direct personal cost for the home property. If you only look at the direct cost, then it’ a personal cost, as you say, but if you look at it in relation to the investment property, then it’s a cost incurred due to the investment property but only indirectly.
[What I’m thinking of is: imagine you paid for a policy and but had to pay separately for a commission which gave you the right to buy that policy. I would have to think it would count as an investment cost. Here, the homeowners policy is an effective commission, in that it’s what gives you the right to buy that landlord policy. (Although to the extent that you would have purchased the homeowners policy anyway then only the added cost is what you’ve incurred for the investment.)]
No, I think I understood what you meant. What I’m saying is that you’re connecting dots between investment expense and personal expense that are irrelevant to the tax code in this situation.
Some of the issue is how Sec 280A so narrowly restricts deductions for expenses related to a personal residence. It begins by saying, essentially, “Nothing is deductible related to your home unless we specifically allow it here.”
I don’t see how that section of the code is relevant here. What it’s discussing is circumstances in which personal expenses might be deductible. What I’m suggesting is that in this case it’s not a personal expense, since it’s being effectively paid for the investment property, not the personal one, and the connection to the home is only nominal. The section you’ve linked to does not address this issue.
But to cut to the chase: are you a tax expert of some sort? Not that you’re not entitled to an opinion otherwise, of course, but if you are one then I wouldn’t want to argue with you about it from my lay perspective.
Sounds like you would be getting a multiple-policy discount. Have you asked the agent if the discount can be applied to the homeowner’s policy instead of the landlord’s policy?
Example using round numbers
current scenario:
rental policy $500 deductible
home policy $500 not deductible
scenario you are avoiding:
rental policy $1000 deductible
home policy $500 not deductible
by signing up for:
rental policy $400 deductible
home policy $700 non deductible
My point is, if you have been running a line item for $500 for rental insurance on tax returns you have a history of that.
If the IRS sees a huge jump in expenses without a corresponding increase in revenue this can trigger them to perform additional scrutiny on your return.
If you claimed $600 in insurance expense to kinda “maintain the status quo” it will probably not surprise anyone on paper it all looks legit. It will however bite you in the butt pretty hard if you are audited. Which Murphys law states will be 6 months after filing the return where you try this.
FWIW, I had put this question to one of my bothers, who is a professional tax preparer (though unlike dracoi, he is not a CPA) and I just got his response via email. He writes: “There probably isn’t any specific ruling discussing this but I would list it all as a investment expense.The additional premium on your home insurance only accrued because of unrelated investments. Therefore I would consider it an investment expense.”
Even if so, that leaves the question as to whether, if I do take the additional cost as a deduction, if I’m simply not going by the “strictest sense”, or if I’m committing outright tax fraud. (I’m much more inclined to do the first than the second, and I think the IRS would probably look at things the same way.)
I didn’t think of that.
From my understanding, I don’t think it would be possible. One of the various agents (or company representatives) that I got quotes from explained that the reason companies insist on both policies is because somehow the liability portion of the homeowners policy is in some manner extended to the investment property. So I’m guessing that they need to consider the homeowners policy as the first one and the investment one as an add-on.
In general, I would assume that the people who you deal with in signing up for these policies don’t have much flexibility beyond typing in numbers and reporting what the program spits out.
OK. Although it should be noted that if I go with the $1,000/$500 option then my deduction for the rental policy would be an even bigger jump, and make it even more likely to trigger an audit. I guess I wouldn’t have so much to fear from an audit in that case, but I’m not keen on having one in any event.
Also, the insurance costs are a small percentage of the expenses for this property, and are dwarfed by investment interest costs, taxes, depreciation, and (some years) repairs/maintenance. So I wouldn’t expect a big swing in overall expenses.
I am known to be wrong, occasionally and obviously am not your personal tax advisor or doing extensive research on this precise issue…
But I really do think it’s going to come down to documentation and that is not going to favor your position unless the insurance company is willing to write it up in a way that allocates prices the way you’d like it.
The following is not advice for your situation, but a general rule when you have a reasonable argument as to why you should be entitled to a deduction or exclusion but aren’t really sure if it would pass muster if someone looked at it closely.
If I was hypothetically unsure about a situation like this, I would take it as an expense, and if audited and questioned, explain my reasoning. If the IRS disagrees, and I cannot come to terms with them, I will owe the excess tax and interest, but not any penalty because I had a reasonable basis for claim. So I’m not out anything I wouldn’t have been out by not taking the chance that they’ll see things my way (assuming I’m making interest on the money I don’t pay as tax). So unless your claim is frivolous or there’s clear evidence that it will not work as an argument, it pays on balance of possible outcomes to take the deduction and argue your case afterward.
Again, that’s general advice that does not take the situation advanced into account, but was my first thought when I really couldn’t decide one way or the other based on my off-hand understanding of tax law.
Also, unless there are other audit flags on your return, it probably won’t be investigated as nothing would look out of the ordinary on the return. So you’re really concerned about doing what you feel is most fair to the government, and that’s on you to decide, not what whatever the tax law experts would decide if they took the time to look at the case.
Homeowner insurance and rental unit insurance would be two different policies. There will be an explicit number charged for your rental unit, and that’s the number that you put on your tax return. Including any of your strictly personal expenses into your business expenses, for the purposes of paying less taxes, is a the crime of tax evasion … and most certainly your homeowners insurance is strictly personal … which policy pays out depends on which property the tenant done did broke his leg at.
