Flooding is the most common and most expensive natural disaster that a homeowner may have to deal with, according to the U.S. Federal Emergency Management Agency. Even in hurricanes, it’s flooding, rather than high winds, that typically causes the most property damage. Although the federal government provides a disaster loss tax deduction, in most cases flood insurance premiums cannot be deducted by homeowners and renters.
TL;DR (Too Long; Didn't Read)
Homeowners and renters can't deduct flood insurance premiums on their federal tax returns.
Who Needs Flood Insurance?
Homeowners insurance covers water accidents within the home caused by burst pipes or broken appliances, but it will not cover damages from water that has been on the ground outside. Yet all it takes is a few inches of water to cause tens of thousands of dollars in damage to a home. FEMA recommends that all homeowners and renters get flood insurance, even if they don’t live in an area identified as high risk. Flooding can occur unexpectedly due to rainfall accumulation, poor drainage or broken water mains.
FEMA defines the risk level of various flood zones across the country. Under federal law, mortgage lenders must require homeowners who live in designated high-risk flood zones to purchase flood insurance. Lenders are allowed to require flood insurance from any borrower, even for property not in a FEMA high-risk area. Any homeowner is allowed to purchase flood insurance to protect their home investment.
Is Flood Insurance Tax Deductible?
Some of the expenses associated with owning a home are tax deductible, including mortgage interest and state and local property taxes. Flood insurance premiums are not in this category and are not tax deductible for individual taxpayers. This is not true of businesses, which are allowed to deduct the premiums for fire, theft and flood insurance. Landlords are viewed as business owners and are allowed to deduct flood insurance for residential rental properties.
How Does Flood Insurance Work?
Private homeowners or renters insurance doesn’t usually cover flooding. In response, the federal government provides flood insurance support through the National Flood Insurance Program. In 2018, about 5.1 million homeowners and renters took advantage of NFIP-backed insurance. FEMA reports that about 20 percent of flood insurance policyholders live outside high-risk flood areas.
Although national flood insurance is administered by FEMA, homeowners purchase it from private insurance agents. In order to qualify for NFIP-backed flood insurance, a homeowner must live in a community that participates in the program. The National Flood Insurance Program Community Status Book, available on the FEMA website, lists NFIP insurance availability by state and territory.
The maximum coverage limits available through NFIP flood insurance policies are $250,000 per residence and $100,000 for furniture, clothing, electronics and other items in the home. Renters can purchase up to $100,000 for the contents of a rental home. FEMA reports that additional coverage known as Excess Flood Protection is available through private insurance carriers once NFIP coverage has been maxed out.
Calculating the Cost of Flood Insurance
The cost of flood insurance is determined by FEMA and individual insurance carriers are not allowed to set their own premium rates. The flood insurance cost calculator used by FEMA to determine insurance premiums takes several factors into account. Besides the amount of coverage desired, a home’s location and its elevation in relation to historic flood levels will affect the cost of flood insurance.
Homeowners and renters who live in areas with low to moderate flood risk may qualify for a Preferred Risk Policy. This policy offers protection for as little as $325 per year. It’s available in the same areas as NFIP insurance. Also, FEMA reports that homes that are elevated at least three feet above the base flood elevation for their area can be insured for about 60 percent less.