This article is reproduced with permission from Spidell Publishing, Inc.
Claim Denied Due to Incorrect Insurance Policy
Taxpayers were denied a theft loss deduction for items stolen from a vacant rental home where they stored furnishings and other personal property. The taxpayers did not have a proper appraisal or evidence of the property that was allegedly stolen (hence the denied deduction), but they also learned that they carried the wrong type of insurance on the rental.
The taxpayers’ rental home was in a rough neighborhood and because they did not want to leave the home vacant, they asked a friend to move into the property to keep things in order in lieu of paying rent. Shortly after entering into this arrangement, the friend moved to Nevada for medical treatment, but he did not inform the taxpayers he was leaving.
Months later, the taxpayers’ son drove past the property and discovered that not only was the house vacant, it was being used by squatters who had stolen everything that was not nailed down in the home and many items from the detached garage (including two antique cars). In all, the taxpayers estimated over 1,000 items were missing at a fair market value of $749,477. The taxpayers filed a claim with Allstate, with whom they had their homeowners’ insurance. Allstate denied the claim, reasoning that not only did the taxpayers subject the property to an “increase in hazard” by leaving it in the hands of a caretaker, but they also should have switched their insurance policy from homeowners’ to landlord’s insurance.
In a nutshell, the right policy will depend on the type of property being insured:
- Homeowners’ insurance may be the best option if the property is only rented sporadically, for example, when renting out a home a few times a year to coincide with major events, like a sporting event; whereas
- Landlord’s insurance is likely a better fit for long-term rentals.
States also may have very specific requirements, which may not be covered if the wrong policy is in place.
Landlord’s insurance covers the building itself, plus any other structures on the property, like a shed or fencing. However, it does not cover anything except the items used to service the rental property, for example, maintenance equipment, furniture, and appliances used by the tenant. This means that any personal items stored at the rental will not be covered, as the taxpayers in this case discovered. And, landlord’s insurance does not cover the tenant’s property; a tenant would need to purchase renter’s insurance.
Most landlord’s insurance policies also incorporate some liability coverage in the event a tenant is injured on the property and the property owner is found to be responsible. Some policies offer an add-on for renter default protection, which pays for last rental income if a tenant fails to pay rent, must be evicted due to a court order, undergoes a hardship, or dies unexpectedly. For more information, see the Insurance Information Institute’s website at www.iii.org/article/coverage-for-renting-out-your-home.
Some policies may require a rider to an existing policy if you are going to be doing infrequent short-term rentals. For those who want to rent out a room in their residence through an online hosting service, some coverage may be included through the platform. For example, Airbnb includes Host Protection Insurance in its basic fee, which provides primarily liability coverage for up to $1 million for third-party claims of bodily injury or property damage, and may also cover damages caused by guests. Regarding long-term rentals, keep in mind that it may not be possible to purchase a homeowners’ insurance policy on a home if the homeowner will not be residing there.
Taxpayers who keep their starter home as a rental property should verify that the property is properly insured, since they may not have considered their policies would need to change when they started renting out the property.
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