Umbrella Insurance Deductability

General Real Estate Investing
1

I purchased an umbrella policy (in name of my wife and myself) to protect us in the case I am sued by one of my tenants. The policy covers 2 of my properties owned by my LLC as well as another property I own jointly with my wife (first investment property ever purchased) that was purchased prior to me starting the LLC. It also covers our personal residence and the usual umbrella policy crapola.

The question I have is if the policy premium (or portion of the policy premium) is tax deductible. In the several years since I purchased the policy I have not deducted the premium.

jmd_forest

2

I would argue that the expense is deductible, in that absent the rental properties you would not need the insurance.

Rather than splitting hairs, I’d just deduct it on the Sch E.

Dave may disagree. :argue

3

I would agree with a prorated deduction on Schedule E.

Add up the liability limits on all the underlying policies for your rentals, the other investment property, your primary residence, your automobile(s), and any other insured assets that have liability coverage.

For each rental policy, multiply the umbrella premium by the liability coverage on the underlying hazard insurance policy, then divide the result by the total of the liability limits on all the underlying policies.

For example, if you have $1 million liability coverage on each of your investment properties and your personal home and $500K liability on your automobile, then the umbrella is covering $4.5 million in total liability on the underlying policies. Thus, approximately 22.22% of the umbrella policy premium in this example can be allocated to each rental property, and deducted as additional insurance on your Schedule E.

4

If the total premium is under $200, I wouldn’t prorate. That’s what I call “immaterial.”

If you do prorate, complete an expense report and have the LLC reimburse you, so the LLC gets its part of the deduction as well.

5

The policy is a $2M policy per incident above the individual limits ($500K) on each of the covered properties. Cost is a little over $400.

I’m leaning towards having the LLC reimburse me 75% (3 of the 4 properties covered are investment properties) of the cost via the LLC’s Accountable Plan.

jmd_forest

6

We deduct our umbrella liability policy, cost $580/year.

If we didn’t have rentals we wouldn’t have one either.

Furnishedowner

7

If only two of the three properties are owned by the LLC, then shouldn’t the reimbursement from your LLC be 50% or less. I am leaning toward less if your umbrella also extends to your vehicles.