Are Home Warranty Premiums Tax Deductible?
The Internal Revenue Service (IRS) allows several home related warranty expenses to be deducted from income tax. While most homeowners enjoy tax exemption on expenses like mortgage interest, property taxes etc, some are unaware whether home warranty premiums tax deductible are allowed tax deductions.
When some of our readers approached us with this question, we realized that this could be a common question among homeowners across the country. We have tried to address that concern up to the best of our ability and we hope that this article will clear up any confusion you had about such tax deductions. This is why you should take time to determine the best among the home warranty companies in the market.
Tax exemption on home warranty premiums
As you may know, a home warranty is essentially a service contract that agrees to provide you with discounted repair and replacement services. In the United States of America, homeowners unfortunately do not enjoy the benefit of exemption on a home warranty premium you pay for your residence.
However, warranty premiums can be tax deductible if they are on an income producing building. Which means if your house is something like a home office or if it is a house that you have rented out, the premium you pay towards home warranty will be considered as a deductible expense.
A premium paid towards home warranty is considered as a pre-paid maintenance cost of your home and will therefore be non tax deductible. Which means that repairs and replacement costs, no matter how they are covered, will not be a valuable tax deduction.
If you are a tenant in some house that enjoys the protection of a home warranty plan you pay for, you will not be able to claim exemption on its premium. Only the owner will be able to consider premiums as deductible expense.
Even if you don’t have a home warranty or a home insurance policy, expenses towards repairing and replacing household appliances/ systems will be considered as maintenance costs and hence will not be tax-deductible.
In this case too, if the repair/replacement was needed for an income producing building/home, you may be able to claim an exemption.
Are home repairs tax deductible?
In case you use your home as a personal residence then you cannot deduct the cost of home improvements or repairs. These costs are nondeductible personal expenses. But this does not mean that home improvements do not have a tax benefit. The cost of home improvements are added to the tax basis of your home.
Are home insurance premiums tax deductible?
Typically, no. IRS allows homeowners to deduct private mortgage interest from federal taxes. But, homeowner’s insurance premiums shall not receive tax exemption. Same applies to flood or title insurance. This is pretty much the way home warranty premiums work. Unless an income is generated by the building like in the case of rental properties or home office, you are out of luck.
IRS allows the following expenses to be considered as tax deductible expenses-
- Mortgage interest payments
- Taxes paid towards real estate
- Payments towards mortgage insurance premiums
- Uninsured losses due to hazards or crimes
The following are considered as non-exemptible expenses-
- Homeowners insurance or in general any insurance against hazards
- Payments towards mortgage principle
- Home maintenance and related expenses
- Home improvement expenses
Most home warranty policies have a deductible of nearly $100 or the cost of repair whichever is lesser. But, banks do not typically pay for a home warranty on foreclosure or short sale. This is why home buyers should purchase one for homes based on the need.
For a landlord, the cost of a home warranty on a rental property is tax deductible. This is based on both the annual premium and other service fees based on operating expenses which can be claimed by income tax.
Based on the types of selling expenses, it can be deducted from the home sale profit. You are allowed to deduct from the sales price almost all types of selling expenses except for those that physically affect the property. This expenses could also include advertising.
The IRS will not allow you to deduct the home warranty cost as a selling expense if you are computing the gain or loss of sale of your home.
Consumers usually expect more from plans than they deliver. You should know that home warranties are not insurance policies. A home warranty is a company’s agreement to repair and replace specified home components.
Being on the safer side
We have noticed that it is a common practice to confuse home insurance and home warranty. While homeowner’s Insurance is mandatory for homes with mortgages, a home warranty is usually a choice. Though home warranty premiums may not help you save tax dollars, if your home and its contents are 4+ years old, they are a very wise purchase. Such service contracts provide you with discounted repairs and replacement services if your appliances/systems break down due to normal wear and tear, such damages are typically omitted by homeowner’s insurance. At the end of the day you save more money if you pay premiums for a warranty than if you pay for a repair/replacement job.
If you are worried that a home warranty is going to be expensive, we earnestly encourage you to use our website to get a free quote. You’ll be surprised to find that there are some companies that sell warranty products at compelling prices, some even at zero deductible rates. You can also browse through our site to compare plans and their features. While you are at it, don’t forget to take a look at top ten companies and our annual home warranty award winners!
Our readers are welcome to reach out to us should they have any questions or concerns. We hope that you found this article helpful and informative. Thank you!