If you own a property that is only used as a rental property, then you can deduct 100% of any flood insurance premiums when you file taxes. However, if you own a property that you use both personally and as a rental, then you can only deduct a percentage of your flood insurance premiums from your taxable income.
The exact percentage of your flood insurance premiums that can be deducted for a mixed-use (i.e. personal and rental) property is the percentage (e.g. of time and/or square footage) of the property that is used for business.
Example 1
Bob owns a 1,500 square foot house. He uses 1,000 square feet of that house as his primary residence, and he rents out the remaining 500 square feet to a college student. Each year, Bob pays $600 for flood insurance. Since Bob only uses 1/3 of his house for his rental business, he can only deduct 1/3 of his flood insurance premiums ($200) from his taxable income.
Example 2
Alice owns a house in Miami, Florida. She and her family use the house for 4 months out of each year. For the remaining 8 months, she rents out the house on Airbnb. Each year, she pays $3,000 in flood insurance. Since Alice only rents the house for 2/3 of each year, she can only deduct 2/3 of the flood insurance premiums she pays each year (i.e. $2,000).
Example 3
Chad owns a 4,000 square foot house in Hollywood, Florida. He lives in the house year round as his primary residence, but for 6 months out of each year, he lists a 1,000 square foot piece of his house on Airbnb. That means that he rents 1/4 of his house for 1/2 of each year. 1/4 times 1/2 = 1/8. That means that 1/8 of Chad’s house usage is for business purposes. If Chad pays $4,000 a year for flood insurance, he can deduct 1/8 x $4,000 = $500 from his taxable income.
Example 4
Greg owns a C corporation that owns a warehouse in St. Augustine, Florida. The warehouse is used exclusively for business, and the C corporation pays $5,000 each year for flood insurance. The entire $5,000 of flood insurance can be deducted from the C corporation’s taxable income each year.
Why is flood insurance tax deductible?
The IRS treats rental properties as businesses. Since insurance is a normal business expense in the eyes of the IRS, and since normal business expenses are tax deductible, flood insurance is tax deductible.
Earthquake insurance, landlord insurance, and normal property insurance are also tax deductible for rental properties.
NOTE: There is an asymmetry between flood insurance and flood losses when it comes to taxes. If you pay $1,000 per year for flood insurance for 10 years, then you’ll have $10,000 of tax deductible expenses. However, if you don’t buy any flood insurance for 10 years and in the 10th year incur $10,000 of property damage from a flood, then that $10,000 of damage may or may not be tax deductible, depending on the circumstances (discussed below).
Is flood damage tax deductible?
Flood damage to a rental property is tax deductible to the extent that the damage is not covered by insurance. Flood damage to personal-use property is tax deductible to the extent that the damage is not covered by insurance if the property was located in a federally declared disaster area.
Losses due to flood damage (for both personal-use and rental properties) are reported on IRS form 4684.
Personal-use Property
The personal-use property rule was altered by Trump’s Tax Cuts and Jobs Act and is in-effect 2018-2025 (although it may get extended past 2025 by Congress). You can search for federally declared disaster areas in FEMA’s disaster database. Federally declared disasters have an EM number which must be recorded on IRS form 4684.
Additionally, the maximum amount an individual can deduct for flood losses on personal-use property is subject to two limitations. First, the loss must be at least $100 to claim any deduction. Second, the loss must be greater than 10% of the individual’s AGI (adjusted gross income).
Example 5
Nick owns a house that was flooded, ruining all of his furniture ($9,000 of damage). He received a $5,000 insurance payout. Nick makes $30,000 per year.
Nick can only deduct flood losses of $900 = $9,000 – $5,000 (insurance pay out) – $3,000 (10% of his AGI) – $100 (floor).
Rental Property
Flood damage to rental properties is tax deductible (to the extent not covered by insurance) regardless of whether or not the properties were located within federally declared disaster areas.
Example 6
Alex owns an Airbnb rental property in Tennessee, and his property has a river that runs through it. Alex paid $1,000 for flood insurance with a $10,000 deductible this year. During a storm, the river overflows and floods the house, causing $50,000 of damage. However, the storm is not large enough to be federally declared as a disaster.
Alex’s flood insurance company pays him $40,000 (for the $50,000 of damage minus the $10,000 insurance deductible). Alex can deduct $11,000 from his taxes ($10,000 for the flood damage that was part of the insurance deductible plus the $1,000 he paid in flood insurance premiums).
Example 7
Bart owns a house at the bottom of a hill in North Carolina. For 6 months out of each year, Bart lives in the house. For the other 6 months, Bart lists the entire property on Airbnb. Each year, Bart pays $1,000 for flood insurance with a $10,000 deductible.
One night in 2022, a storm causes a nearby river to overflow and flood Bart’s house, causing $40,000 of damage. The storm is not big enough to be a federally declared disaster.
Bart’s insurance company offers a $25,000 settlement, and Bart takes it. That means Bart has $15,000 of flood damage not covered by insurance.
Since Bart’s property is 50% business use, and since the flood was not a federally declared disaster, he can only deduct 50% of that $15,000.
In total, Bart deducts $7,500 of flood damage not covered by his insurance plus $500 (50% of his flood insurance premiums) for flood insurance.
NOTE: The IRS measures flood damage using a conservative yardstick that works against people who owned property for a long period of time before a flood hits. More precisely, the IRS computes flood damage as the lesser of two numbers:
- The property’s adjusted tax basis immediately before the loss (e.g. the price you paid for the property minus accumulated depreciation), or
- The property’s decline in fair market value due to the flood
That means any appreciation your property may have experienced between when you bought it and when the flood hit is not considered.
Example 8
Candice bought a rental house in Tampa, Florida for $200,000. She does not have flood insurance. Five years after she bought the house, it has a market value of $300,000 but a tax basis of $164,000 (because of depreciation). That year, a hurricane causes a flood that destroys the entire house. Candice can claim a $164,000 tax deduction.
Should landlords buy flood insurance?
If losing an entire property worth hundreds of thousands or more would be a serious financial consequence for you or your rental business, then I would buy flood insurance on any properties in medium to high risk flood zones. I would also make sure to update your insurance every 1-5 years to ensure you don’t have too much uninsured equity accruing from property appreciation.