Claim home insurance for a rental property

[songcai2]

The home insurance for my rental property is paid on 12/22/2016, but it covers from 12/22/2016 to 12/21/2017.
Should I claim the home insurance premium $960 as expense on tax year 2016 because it's paid in 2016? Or wait till tax year 2017 to claim since it covers year2017?

Thanks

[view2 · Accepted solution]

Generally an expense cannot be deducted if paid in advance. The prepaid amount is treated as an asset with a useful life extending beyond the current tax year, and carried over to the tax year where the expense applies.

However

Twelve month rule exception:

 The rule does not apply if the prepaid amount does not extend beyond 12 months after the benefit begins.    Paying a 12 month insurance policy or 12 month licensing fee, for example, is generally deductible when the payment is made.

Insurance is a prepaid expense, because the purpose of purchasing insurance is to buy proactive protection in case something unfortunate happens. Clearly, no insurance company would sell insurance that covers the occurrence of an unfortunate event, after the fact, so insurance expenses must be pre-paid.

Expense paid in advance.   An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule.

  Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following.

• 12 months after the right or benefit begins, or

• The end of the tax year after the tax year in which payment is made.

https://www.irs.gov/publications/p538/ar02.html#en_US_201612_publink1000270640

[MargaretL]

You are correct, you should wait till 2017 and report it on your 2017 tax return. Per IRS Publication 527, page 3: "Insurance premiums paid in advance. If you pay an insurance premium for more than one year in advance, you cannot deduct the total premium in the year you pay it. For each year of coverage, you can deduct only the part of the premium payment that applies to that year."

[j-ong]

Hello @MargaretL, I am in the same situation.

I pre-paid 1-year worth of premium as part of the closing cost for my rental property.

Since it does not go beyond 12 months, I assume I can expense the entire amount this year.

From publication 527: "Insurance premiums paid in advance. If you pay an insurance premium for more than 1 year in advance, you can’t deduct the total premium in the year you pay it. For each year of coverage, you can deduct only the part of the premium payment that applies to that year. See chapter 6 of Pub. 535 for information on deductible premium"

From publication 538: Example 2. You are a calendar year taxpayer and pay $10,000 on July 1, 2018, for a business insurance policy that is effective for only one year beginning on July 1, 2018. The 12-month rule applies. Therefore, the full $10,000 is deductible in 2018.

[Carl]

Assuming you pay your insurance premiums once a year and that you do not pay for more than one year of coverage with each payment, then regardless of what day you pay it, and regardless of what period of time it covers (maximum of 12 months), the insurance premium is a fully deductible rental expense in the tax year it is paid. Period.

[j-ong]

Thanks, @Carl!  Appreciate the response.