Insurance, A Tax Deductible Expense

Tax season is right around the corner. If you are a landlord or invest in residential rental properties there are a number of factors to consider when completing your annual tax return. One of the most important considerations is making sure you are correctly counting your business expenses as tax deductions.

Publication 527 of the Internal Revenue Service lists insurance premiums as a deductible expense for rental property owners. While coverage such as Aon Rent Protect helps reduce the risk of tenant non-payment, using it as a tax deduction can potentially lower your tax liability.

Whether you own rental property such as a single-family home, a duplex or an entire apartment building, if you factor in the possible tax savings, purchasing coverage like Aon Rent Protect can have a positive impact on your tax situation. When considering the cost benefits, remember your tax situation will vary based on many variables including but not limited to your location and applicable local laws.

The following hypothetical is for illustrative purposes only to show how Aon Rent Protect can potentially affect a landlord’s taxes and overall expenses.

A Sample Landlord’s Tax Bill

Landlord Tom Watson owns four rental houses. Tom charges his tenants $1,000 a month for rent. Tom’s gross annual rental income for a year is:

4 rental units
x 12 months
x $1,000 rent per unit
= $48,000 gross annual rental income

Tom’s mortgage payments, property taxes and other expenses amount to $10,000 per unit. Therefore his annual expenses amount to:

4 rental units
x $10,000 annual expenses
= $40,000 annual rental property expenses

His adjusted gross income equals: $48,000 - $40,000 = $8,000 for the year. If Tom falls in the 25% tax bracket, he will owe:

$8,000 adjusted gross rental income
x .25 tax rate
= $2,000 estimated annual taxes

This makes Tom’s after-tax rental income $6,000.

The Potential Impact of Deducting Aon Rent Protect

Cautious landlord that he is, Tom has rent default insurance coverage like Aon Rent Protect on all four rental properties. The annual cost of his insurance is:

$250 annual premium per rental property
x 4 rental units
= $1,000 annual Aon Rent Protect premium

This extra $1,000 now gives Tom $41,000 worth of deductible business expenses, making his adjusted taxable income now $7,000 instead of $8,000. Assuming the same tax rate, with an Aon Rent Protect policy, Tom would now pay in taxes:

$7,000 gross annual rental income
x .25 tax rate
= $1,750 estimated annual taxes

This makes Tom’s after-tax rental income now $5,250.

Tax Deduction Helps Reduce Cost of Insurance

While $6,000 in earned income is more desirable than $5,250, if we focus on Tom’s tax bill, his purchase of Aon Rent Protect helped lower his taxes from $2,000 to $1,750.

To take it a step further, if we apply the $250 difference in Tom’s estimated annual taxes and divide the tax savings between his four properties, instead of costing $250 per unit per year, his Aon Rent Protect coverage cost:

$750 net insurance annual cost
÷ 4 rental units
= $187.50 adjusted annual Aon Rent Protect premium per unit

That’s a small price to pay, for rent default insurance, particularly should one of Tom’s tenants lose their job and be unable to afford to pay their rent for six months.

For more information about Aon Rent Protect, including rates, coverage details and an online application, visit www.aonrentprotect.com/biggerpockets .