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Is umbrella insurance tax deductible? A guide for landlords

house and money pile under red umbrella
by Jeff Rohde, posted in Investment Strategy

Umbrella insurance can provide extra protection for your real estate investments in the event of a lawsuit. But is umbrella insurance tax deductible?

The answer may surprise you. Read on to learn more about the tax deductions available for umbrella insurance policies.

Key takeaways

  • Umbrella insurance can provide extra protection for your real estate investments in the event of a lawsuit.
  • Umbrella insurance policies may be tax deductible, depending on your individual circumstances.
  • Insuring your rental property with an umbrella policy can help you protect your from costly legal fees and damages awarded in a lawsuit.
  • Speak to an accountant or financial advisor to learn more about the tax deductions available for umbrella insurance policies.


What is umbrella insurance for rental property?

Landlords and real estate investors are often responsible for multiple properties, making umbrella insurance an important part of their risk management strategies. 

Unlike other types of landlord insurance, umbrella insurance is designed to provide coverage for claims that exceed the primary policy limits. This means it can help landlords protect themselves from catastrophic losses, such as a fire that destroys a rental property. 

It can also help landlords cover the costs of legal fees, damages, and judgments against them if they are sued. Umbrella insurance can cover expenses related to harassment, personal injury, workers’ compensation, and more. 


tax deduction

Does umbrella insurance qualify as a tax deduction?

Landlords and real estate investors often ask whether umbrella insurance is a tax-deductible expense. Unfortunately, the answer is not a simple yes or no. 

In order to qualify for a deduction, umbrella insurance must be purchased for the express purpose of protecting business income. So, if you purchase umbrella insurance to cover your personal assets, it would not be considered a business expense and would not be tax deductible. 

However, if you purchase umbrella insurance to protect your rental income, it could be considered a deductible business expense. As always, investors may wish to speak with a tax professional to get the most accurate information for their specific situation.


What umbrella insurance for rental property covers

Having umbrella insurance is often essential for protecting rental property. Umbrella insurance covers a wide range of potential liabilities, including:

  • Liability in excess of standard landlord insurance policy limits
  • Libel and slander
  • Personal psychological damage and mental stress
  • Defense costs for insured losses


What is not covered by umbrella insurance?

Umbrella insurance can help you protect your assets and income in the event of a large judgment against you. 

However, umbrella insurance does not cover everything. For example, landlords may be surprised to learn that umbrella insurance does not cover their own personal injuries, personal property, personal expenses, or punitive damages. In addition, umbrella insurance is not tax deductible if it is a personal expense. 

Carefully consider whether umbrella insurance is right for your rental property. Consult with a tax advisor to determine if umbrella insurance makes sense for your business.


Average cost of an umbrella insurance policy

Umbrella is commonly sold in increments of $1 million. The premium for umbrella coverage varies and you should check with your insurance agent or broker. However, typical costs range from $150 and $350 a year for the first $1 million of coverage, with costs rising proportionately for each additional $1 million of coverage purchased.

The cost of umbrella insurance depends on a number of factors, including the value of your assets, the size of your deductible, and the amount of coverage you need. Factors that can affect the cost of umbrella insurance for rental property include:

  • The value of your rental property. The higher the property value, the more umbrella insurance you will need.
  • The size of your deductible. The larger your deductible, the lower your premiums will be. However, you will be responsible for paying more out of pocket if you have a claim.
  • The amount of coverage you need. The more umbrella insurance coverage you need, the higher your premiums will be. However, this will give you more financial protection in the event of a lawsuit or accident.
  • Your claims history. If you have had claims against you in the past, you may be required to pay higher premiums for umbrella insurance.


How to deduct umbrella insurance from operating expenses

Umbrella insurance is typically deducted as an operating expense on Schedule E of your tax return. This is the form used to report income and expenses from rental property. On Schedule E, you’ll list your umbrella policy premiums under “Insurance.” 

The entire premium is deductible as long as the umbrella policy covers only the rental property. Then, when you calculate your net income from the rental property, you’ll deduct those premiums along with other operating expenses.

Deducting umbrella insurance from your rental property income can help you reduce your taxable net income and subsequent tax liability. 


Tips for tracking rental property insurance expenses

A spreadsheet is a good option if you’re comfortable working with numbers and formulas. For example, you can create a separate sheet for each rental property and include columns for the date, premium amount, policy number, and other relevant information. The Zillow Rental Income and Expense worksheet is one example, although you will need to make minor modifications if you want to track detailed insurance policy information.

For something more user-friendly, off-the-shelf accounting programs can track your rental property insurance expenses. Quicken and QuickBooks are 2 popular options, although neither is specifically designed for real estate investors and rental property owners.

There are also software programs specifically designed for tracking rental property expenses and income. These often include top features that landlords need, including:

  • Syncing with bank accounts to automatically track income and expenses
  • Cloud-based storage for organizing and storing important real estate documents online, including umbrella insurance policies
  • Bill payment options that allow tenants to pay the rent online, which can help you improve cash flow and keep tenants happy, leading to higher occupancy rates
  • 24/7 visibility into your portfolio’s performance with automatically generated and updated reports in real time
  • Income statements, balance sheets, cash-flow reports, and more in just a couple of clicks
  • Regular updating of the real estate balance sheet to provide a more accurate idea of assets, liabilities, and owner equity

Options for tracking rental property income and expenses include Stessa, Rentec Direct, RentRedi, and AppFolio. Of these, Stessa is the only software designed for real estate investors and landlords that is 100% free. 

In January 2022, Stessa was ranked as the #1 accounting and software tool by Landlord Gurus, a website that provides expert advice for landlords and property managers.                                  


Where to find umbrella insurance

One option is to contact an insurance agent. They may be able to help you find the right policy for your needs and make sure that you are getting the best rate. 

Another option is to use an online insurance broker specializing in rental property and landlord insurance. These brokers can provide quotes from different insurers. 

Whichever route you choose, ensure you get the coverage you need to protect your investment. Since umbrella insurance for rental property can be tax deductible, factor that into your decision-making process. 

Ultimately, the best way to find the right umbrella policy for your rental property is to shop around and compare quotes from a few different sources. By doing this research, you can be sure that you are getting the best possible protection for your investment.

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