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Tax-loss harvesting enables investors to use investment losses to help reduce the tax impact of investment gains, thus potentially lowering the amount of taxes owed. While a tax loss strategy – sometimes called tax loss selling — is often used to offset short-term capital gains (which are taxed at a higher federal tax rate), tax-loss harvesting can also be used to offset long-term capital gains.

Of course, as with anything having to do with investing and taxes, tax-loss harvesting is not simple. In order to carry out a tax-loss harvesting strategy, investors must adhere to specific IRS rules and restrictions. Here’s what you need to know.

What Is Tax-Loss Harvesting?

Tax-loss harvesting is a strategy that enables an investor to sell assets that have dropped in value as a way to offset the capital gains tax they may owe on the profits of other investments they’ve sold. For example, if an investor sells a security for a $25,000 gain, and sells another security at a $10,000 loss, the loss could be applied so that the investor would only see a capital gain of $15,000 ($25,000 – $10,000).

This can be a valuable tax strategy for investors because you owe capital gains taxes on any profits you make from selling investments, like stocks, bonds, properties, cars, or businesses. The tax only hits when you profit from the sale and realize a profit, not for simply owning an appreciated asset.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

How Tax-Loss Harvesting Works

In order to understand how tax-loss harvesting works, you first have to understand the system of capital gains taxes.

Capital Gains and Tax-Loss Harvesting

As far as the IRS is concerned, capital gains are either short term or long term:

•   Short-term capital gains and losses are from the sale of an investment that an investor has held for one year or less.

•   Long-term capital gains and losses are those recognized on investments sold after one year.

Understanding Short-Term Capital Gains Rates

The one-year mark is crucial, because the IRS taxes short-term investments at the investor’s much-higher marginal or ordinary income tax rate. There are seven ordinary tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

For high earners, gains can be taxed as much as 37%, plus a potential 3.8% net investment income tax (NIIT), also known as the Medicare tax. That means the taxes on those quick gains can be as high as 40.8% — and that’s before state and local taxes are factored in.

Understanding Long-Term Capital Gains Rates

Meanwhile, the long-term capital gains taxes for an individual are simpler and lower. These rates fall into three brackets, according to the IRS: 0%, 15%, and 20%. Here are the rates for tax year 2023, per the IRS.

The following table breaks down the long-term capital-gains tax rates for the 2023 tax year (for taxes that are filed in 2024) by income and filing status.

Capital Gains Tax Rate	Income – Single	Married, filing separately	Head of household	Married, filing jointly
0%	Up to $44,625	Up to $44,625	Up to $59,750	Up to $89,250
15%	$44,626 – $492,300	$44,626 – $276,900	$59,751 – $523,050	$89,251 – $553,850
20%	More than $492,300	More than $276,900	More than $523,050	More than $553,850

Source: Internal Revenue Service

So if you’re an individual filer, you won’t pay capital gains if your total taxable income is $44,625 or less. But if your income is between $44,626 to $492,300, your investment gains would be subject to a 15% capital gains rate. The rate is 20% for single filers with incomes over $492,300.

As with all tax laws, don’t forget the fine print. As noted above, the additional 3.8% NIIT may apply to single individuals with a modified adjusted gross income (MAGI) of $200,000 or married couples with a MAGI of at least $250,000.

Also, long-term capital gains from sales of collectibles (e.g, coins, antiques, fine art) are taxed at a maximum of 28% rate. This is separate from regular capital gains tax, not in addition to it.

Short-term gains on collectibles are taxed at the ordinary income tax rate, as above.

Recommended: Everything You Need to Know About Taxes on Investment Income

Rules of Tax-Loss Harvesting

The upshot is that investors selling off profitable investments can face a stiff tax bill on those gains. That’s typically when investors (or their advisors) start to look at what else is in their portfolios. Inevitably, there are likely to be a handful of other assets such as stocks, bonds, real estate, or different types of investments that lost value for one reason or another.

While tax-loss harvesting is typically done at the end of the year, investors can use this strategy any time, as long as they follow the rule that long-term losses apply to long-term gains first, and short-term losses to short-term gains first.

Bear in mind that although a capital loss technically happens whenever an asset loses value, it’s considered an “unrealized loss” in that it doesn’t exist in the eyes of the IRS until an investor actually sells the asset and realizes the loss.

The loss at the time of the sale can be used to count against any capital gains made in a calendar year. Given the high taxes associated with short-term capital gains, it’s a strategy that has many investors selling out of losing positions at the end of the year.

Tax-Loss Harvesting Example

If you’re wondering how tax-loss harvesting works, here’s an example. Let’s say an investor is in the top income tax bracket for capital gains. If they sell investments and realize a long-term capital gain, they would be subject to the top 20% tax rate; short-term capital gains would be taxed at their marginal income tax rate of 37%.

Now, let’s imagine they have the following long- and short-term gains and losses, from securities they sold and those they haven’t:

Securities sold:

•   Stock A, held for over a year: Sold, with a long-term gain of $175,000

•   Mutual Fund A, held for less than a year: Sold, with a short-term gain of $125,000

Securities not sold:

•   Mutual Fund B: an unrealized long-term gain of $200,000

•   Stock B: an unrealized long-term loss of $150,000

•   Mutual Fund C: an unrealized short-term loss of $80,000

The potential tax liability from selling Stock A and Mutual Fund A, without tax-loss harvesting, would look like this:

•   Tax without harvesting = ($175,000 x 20%) + ($125,000 x 37%) = $35,000 + $46,250 = $81,250

But if the investor harvested losses by selling Stock B and Mutual Fund C (remember: long-term losses apply to long-term gains and short term losses to short term gains first), the tax picture would change considerably:

•   Tax with harvesting = (($175,000 – $150,000) x 20%) + (($125,000 – $80,000) x 37%) = $5,000 + $16,650 = $21,650

Note how the tax-loss harvesting strategy not only reduces the investor’s tax bill, but potentially frees up some money to be reinvested in similar securities (restrictions may apply there; see information on the wash sale rule below).

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Considerations Before Using Tax-Loss Harvesting

As with any investment strategy, it makes sense to think through a decision to sell just for the sake of the tax benefit because there can be other ramifications in terms of your long-term financial plan.

The Wash Sale Rule

For example, if an investor sells losing stocks or other securities they still believe in, or that still play an important role in their overall financial plan, then they may find themselves in a bind. That’s because a tax regulation called the wash sale rule prohibits investors from receiving the benefit of the tax loss if they buy back the same investment too soon after selling it.

Under the IRS wash sale rule, investors must wait 30 days before buying a security or another asset that’s “substantially identical” to the one they just sold. If they do buy an investment that’s the same or substantially identical, then they can’t claim the tax loss.

For an investment that’s seen losses, that 30-day moratorium could mean missing out on growth — and the risk of buying it again later for a higher price.

Matching Losses With Gains

A point that bears repeating: Investors must also be careful which securities they sell. Under IRS rules, like goes with like. So, long-term losses must be applied to long-term gains first, and the same goes for short-term losses and short-term gains. After that, any remaining net loss can be applied to either type of gain.

How to Use Net Losses

The difference between capital gains and capital losses is called a net capital gain. If losses exceed gains, that’s a net capital loss.

•   If an investor has an overall net capital loss for the year, they can deduct up to $3,000 against other kinds of income — including their salary and interest income.

•   Any excess net capital loss can be carried over to subsequent years and deducted against capital gains, and up to $3,000 of other kinds of income — depending on the circumstances.

•   For those who are married filing separately, the annual net capital loss deduction limit is only $1,500.

How to Use Tax-Loss Harvesting to Lower Your Tax Bill

When an investor has a diversified portfolio, every year will likely bring investments that thrive and others that lose money, so there can be a number of different ways to use tax-loss harvesting to lower your tax bill. The most common way, addressed above, is to apply capital losses to capital gains, thereby reducing the amount of tax owed. Here are some other strategies:

Tax-Loss Harvesting When the Market Is Down

For investors looking to invest when the market is down, capital losses can be easy to find. In those cases, some investors can use tax-loss harvesting to diminish the pain of losing money. But over long periods of time, the stock markets have generally gone up. Thus, the opportunity cost of selling out of depressed investments can turn out to be greater than the tax benefit.

It also bears remembering that many trades come with trading fees and other administrative costs, all of which should be factored in before selling stocks to improve one’s tax position at the end of the year.

Tax-Loss Harvesting for Liquidity

There are years when investors need access to capital. It may be for the purchase of a dream home, to invest in a business, or because of unforeseen circumstances. When an investor wants to cash out of the markets, the benefits of tax-loss harvesting can really shine.

In this instance, an investor could face bigger capital-gains taxes, so it makes sense to be strategic about which investments — winners and losers — to sell by year’s end, and minimize any tax burden.

Tax-Loss Harvesting to Rebalance a Portfolio

The potential benefits of maintaining a diversified portfolio are widely known. And to keep that portfolio properly diversified in line with their goals and risk tolerance, investors may want to rebalance their portfolio on a regular basis.

That’s partly because different investments have different returns and losses over time. As a result, an investor could end up with more tech stocks and fewer energy stocks, for example, or more government bonds than small-cap stocks than they intended.

Other possible reasons for rebalancing are if an investor’s goals change, or if they’re drawing closer to one of their long-term goals and want to take on less risk.

That’s why investors check their investments on a regular basis and do a tune-up, selling some stocks and buying others to stay in line with the original plan. This tune-up, or rebalancing, is an opportunity to do some tax-loss harvesting.

How Much Can You Write Off on Your Taxes?

If capital losses exceed capital gains, under IRS rules investors can then deduct a portion of the net losses from their ordinary income to reduce their personal tax liability. Investors can deduct the lesser of $3,000 ($1,500 if married filing separately), or the total net loss shown on line 21 of Schedule D (Form 1040).

In addition, any capital losses over $3,000 can be carried forward to future tax years, where investors can use capital losses to reduce future capital gains. This is known as a tax loss carryforward. So in effect, you can carry forward tax losses indefinitely.

To figure out how to record a tax loss carryforward, you can use the Capital Loss Carryover Worksheet found on the IRS’ Instructions for Schedule D (Form 1040).

Benefits and Drawbacks of Tax-Loss Harvesting

While tax-loss harvesting can offer investors some advantages, it comes with some potential downsides as well.

Benefits of Tax-Loss Harvesting

Obviously the main point of tax-loss harvesting is to reduce the amount of capital gains tax on profits after you sell a security.

Another potential benefit is being able to literally cut some of your losses, when you sell underperforming securities.

Tax-loss harvesting, when done with an eye toward an investor’s portfolio as a whole, can help with balancing or rebalancing (or perhaps resetting) their asset allocation.

As noted above, investors often sell off assets when they need cash. Using a tax-loss harvesting strategy can help do so in a tax-efficient way.

Drawbacks of Tax-Loss Harvesting

While selling underperforming assets may make sense, it’s important to vet these choices as you don’t want to miss out on the gains that might come if the asset bounces back.

Another of the potential risks of tax-loss harvesting is that if it’s done carelessly it can leave a portfolio imbalanced. It might be wise to replace the securities sold with similar ones, in order to maintain the risk-return profile. (Just don’t run afoul of the wash-sale rule.)

Last, it’s possible to incur excessive trading fees that can make a tax-loss harvesting strategy less efficient.

Pros of Tax-Loss Harvesting	Cons of Tax-Loss Harvesting
Can lower capital gains taxes	Investor might lose out if the security rebounds
Can help with rebalancing a portfolio	If done incorrectly, can leave a portfolio imbalanced
Can make a liquidity event more tax efficient	Selling assets can add to transaction fees

Creating a Tax-Loss Harvesting Strategy

Interested investors may want to create their own tax-loss harvesting strategy, given the appeal of a lower tax bill. An effective tax-loss harvesting strategy requires a great deal of skill and planning.

It’s important to take into account current capital gains rates, both short and long term. Investors would be wise to also weigh their current asset allocation before they attempt to harvest losses that could leave their portfolios imbalanced.

All in all, any strategy should reflect your long-term goals and aims. While saving money on taxes is important, it’s not the only rationale to rely on for any investment strategy.

The Takeaway

Tax loss harvesting, or selling off underperforming stocks and then potentially getting a tax reduction for the loss, can be a helpful part of a tax-efficient investing strategy.

There are many reasons an investor might want to do tax-loss harvesting, including when the market is down, when they need liquidity, or when they are rebalancing their portfolio. It’s an individual decision, with many considerations for each investor — including what their ultimate financial goals might be.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Is tax-loss harvesting really worth it?

When done carefully, with an eye toward tax efficiency as well as other longer-term goals, tax-loss harvesting can help investors save money that they can invest for the long term.

Does tax-loss harvesting reduce taxable income?

Yes. The point of tax-loss harvesting is to reduce income from investment gains (profits). But also when net losses exceed gains, the strategy can reduce your taxable income by $3,000 per year.

Can you write off 100% of investment losses?

It depends. Investment losses can be used to offset a commensurate amount in gains, thereby lowering your potential capital gains tax bill. If there are still net losses that cannot be applied to gains, up to $3,000 per year can be applied to reduce your ordinary income. Net loss amounts in excess of $3,000 would have to be carried forward to future tax years.

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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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A home inspection costs $300 to $400, and while it may not be required by law or your lender, if you’re purchasing a home, you’ll likely want to consider having a professional take a close look. You may even choose to make your contract contingent on the results.

Here’s what you can expect to get for your money.

What Do Home Inspectors Do?

The goal of a professional inspection is to help you avoid being surprised by structural defects, plumbing and electrical issues, or other significant problems when buying a home. In highly competitive local real estate markets, some buyers take the risk of waiving the home inspection (some even go so far as to buy a house sight unseen). But certified home inspectors are trained to find the problems you might not see when you walk through a home that’s for sale (even if you’ve seen the property multiple times).

Many states require inspectors to be licensed, and there are several professional organizations that require their members to follow certain standards of practice. Two of the largest national organizations for certified inspectors are the International Association of Certified Home Inspectors (InterNACHI) and the American Society of Home Inspectors (ASHI), but there are also many state associations.

Below is a list of some of the things on a home inspection checklist that an inspector will look at.


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prequalify for a SoFi mortgage loan,
with as little as 3% down.

Roof Condition

Inspectors aren’t required to stand on a roof to inspect its condition, but they will review the materials used to cover the roof; the gutters and downspouts; any vents, flashing, skylights, etc.; and the general structure of the roof. They’ll also report any evidence of active leaks.

Exterior

This part of the inspection will generally include the exterior walls; the eaves, soffits, and fascia; windows and doors (including garage doors); walkways and driveways; stairs, steps, and ramps; porches, patios, decks, and the like; railings; and any issues that could cause problems with water intrusion.

Structural Soundness

This typically includes looking for cracks or other problems with the home’s foundation, the basement or crawlspace, and other structural components.

Heating and Cooling

The inspector will report on the types of systems used to heat and cool the home and if they are in working order.

Plumbing

This may include checking the main water supply shut-off valve and water heater; running the faucets and flushing all toilets; and reporting drainage problems for sinks, tubs, and showers. The inspector will look for damage, loose connections, leaks, and equipment that wasn’t properly installed.

Electrical

Besides checking a representative number of switches, light fixtures, and receptacles, the inspector will look at the type of wiring used in the home, the electrical panel, the main service disconnect, and any equipment that wasn’t properly installed or repaired. The absence of smoke detectors and carbon monoxide detectors also will be noted.

Insulation and Ventilation

The inspector may note any issues with the insulation used in the home, including the depth and type, and the exhaust systems in the kitchen, bathrooms, and laundry room.

Recommended: First-time Homebuyer Guide

What Isn’t Included in a Basic Home Inspection?

A basic inspection is a noninvasive, visual assessment of accessible areas of the property, so inspectors may not move rugs, furniture, or other items that block their view. If there’s a problem behind a wall or under the floors, the inspector may not catch it. And you shouldn’t expect the inspector to predict how long the roof, appliances, or HVAC system might last.

You may have to hire specialists, and that could add to your overall costs. Specialized inspections might include looking at the swimming pool, fireplace chimney and flue, a well and/or septic tank, and detached sheds and garages. You also may choose to get separate inspections to search for mold, termites, asbestos, lead paint, or radon gas, and to check for municipal code compliance.

While the cost of a single-family home inspection normally ranges from $300 to $500, the price can go significantly higher depending on the home’s square footage and the addition of specialized inspections.

You’ve probably already looked at numbers with a mortgage calculator or plan to. That’s more money you’ll need to come up with before or during your closing.

Why Get a Home Inspection?

A home inspection can cost hundreds of dollars, but getting one could save you thousands. After all, the home you’re buying could be the biggest investment you’ve ever made.

Once you receive your inspection report, it will be up to you to decide if and how you want to move forward with the purchase. As a buyer, you may have a few options, including:

•   If there are problems, you can give the seller a list of requested repairs (based on the inspection, not your taste) that must be completed and paid for as a condition of the sale.

•   You may request a credit, or a seller concession, that gives you enough to pay for the necessary repairs yourself.

•   You could back out of the deal altogether.

You don’t have to do anything, by the way. If you want the home and you think the price is fair, you can proceed with the transaction even if the report lists major issues. Especially in a hot market, you may not be able to use the report as a negotiation tool to lower the price or get the seller to pay for repairs. Still, you’ll have the information you need to make the best decision for your personal needs and goals.

Home Inspection Pros and Cons

Pros	Cons
Can give you an unbiased evaluation of the home you hope to buy	Adds a cost to the already expensive homebuying process
Can help you decide if repairs are in your DIY skill set or would require a pro	Waiving the inspection is risky (even if it makes your offer more appealing in a seller’s market)
May help you assess if the asking price is fair or if you should negotiate
May enable you to ask the seller to make repairs before you buy

Is an Inspection Necessary for a New or Renovated Home?

It might be tempting to waive the inspection if you’re buying new construction or a home that looks new thanks to a remodel. Fresh paint, that “new home smell,” and some professional staging can be a distraction for eager buyers. But even new construction can have problems, and an inspection can help find red flags.

Recommended: Tips to Qualify for a Mortgage

What Factors Into the Price of a Home Inspection?

When you’re shopping for an inspector, you may want to ask for a written estimate of how much you’ll be charged and a breakdown of costs. Here are some things that could affect the price:

Size

The larger the home, the longer it could take to complete the inspection and the inspection report. Here’s a breakdown of approximate costs based on square footage:

Home Size	Approximate Cost
Under 1,500 sq. ft.	$250
1,500 to 2,500 sq. ft.	$325
2,500 to 3,000 sq. ft.	$380
3,000 to 4,000 sq. ft.	$420
Over 4,000 sq. ft.	$500-plus

Age

Because it may take more time — depending on the condition of the home and the design — the inspection for an older home may cost more than for a newer build of the same approximate size.

Location

If the inspector must travel a long distance to get to the home, the cost estimate may be higher. (The inspector may charge by the mile or a negotiated amount.)

The Inspector

How much experience does the inspector have? Are they licensed by your state and/or certified by a professional association like ASHI or InterNACHI? You may have to pay extra for this expertise.

Additional Costs

The first price you’re quoted may not be the final price you’ll pay for an inspection. If you want additional inspections that require more expertise or specialized equipment, you can expect to pay much more. Inspecting detached structures on the property also may increase the price. Ask about those separate costs and if they’ll be listed on your written estimate.


💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls. Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.

How Long Does an Inspection Take?

A home inspection typically takes two to three hours onsite, and you may have to wait one or two days to get your inspection report. You may find it helps to research inspectors even before you find a home so you can move quickly when you’re ready to buy. That way you’ll have plenty of time to read the report and decide what you want to do about any points of concern.

Home inspection contingencies, which can allow buyers to get out of the contract if they find something they don’t like, usually have a tight deadline. You may have to send formal notice to the seller that you’re canceling the contract within seven days after signing the purchase agreement.

Are Any Fixes Mandatory After an Inspection?

A home inspector’s report isn’t a list of “must-dos.” Most repairs are negotiable. And you may decide not to press the seller for any fixes. But it’s important to be aware of the cost of home repairs that may be needed down the line.

In some cases, a buyer may be denied financing or insurance if the bank or insurer isn’t satisfied with the results of an inspection and the planned repairs. Those items likely would include dangerous structural or electrical defects and/or building code violations.

Tips on Choosing an Inspector

Word-of-mouth references can be a great place to start when you’re looking for a home inspector. There are also plenty of online sites that can help you find local inspectors. Once you have a few names, you can:

Once you have a few names, you can:

Look for Online Reviews

There are several sites that list inspectors, and some offer reviews. You also can ask the inspector for references.

Check Credentials

Is the inspector a member of a professional organization? You may want to ask to see a membership card. And don’t forget to ask for proof of licensing if it’s required in your state.

Ask About Experience

How long has the inspector been in the business? Experienced inspectors likely will have seen several types of homes and know where to look for problems.

Get Pricing Information

You can start by asking about the cost of a basic inspection and what it includes, then go from there. If the inspector does specialized tests you’re interested in (for mold, radon, asbestos, etc.), you can request to have those costs included in the estimate.

Compare Sample Reports

One way to gauge an inspector’s work may be to look at a past report and compare it to other companies’ reports.

Set the Date

Keep your timeline in mind as you consider who to hire. Things can move quickly in the mortgage process, and you don’t want your inspection to hold up the deal.

Try to be there when the inspector is working so you can see the home through an unbiased lens. If you can’t be there, you may want to ask your real estate agent to attend.

The Takeaway

It might be tempting to skip the home inspection to save money or time, or to make your offer more appealing. After all, the average home inspection cost is $300 to $400 and could go higher. But a home inspection can provide an important layer of protection and reassurance that the money you’ve budgeted for your new home will be well spent.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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The Insurance Information Institute cites that the average cost of renters insurance across the United States is about $173 per year, according to their most recent data. That said, renters insurance premiums can vary widely based on where you live, your claims history, and your chosen coverage limits, among other factors.

Let’s take a look at renters insurance and what factors go into its cost.

What Is Renters Insurance?

Renters insurance policies offer similar coverage to homeowners insurance. The goal is to reimburse you for any losses that you suffer in an emergency. Imagine if you were renting a house and a leak flooded your clothing closet, destroying your entire wardrobe. Or if a burglar broke in while you were out and made off with your laptop and other electronics. These losses would be one level of pain. Not having insurance that could help you afford replacements would only add a whole other level to that!

It’s generally a good idea to purchase a renters insurance policy if you’re renting a home, regardless of whether it’s an apartment or a house. This holds true even if you are renting an apartment in a private home rather than an apartment complex. Your landlord may have homeowners insurance that is designed to reimburse them in the event of say, damage or a robbery. This however generally does not cover your assets in the event of a loss.


💡 Quick Tip: Online renters insurance can cover your belongings not just at home but also in your car and on vacation.

Average Cost of Renters Insurance by State

We’ve included the average annual renters insurance premiums for each state in the table below. This data is based on the latest figures from the Insurance Information Institute, a nonprofit organization that collects and shares data related to the insurance industry.

State	Average annual premium
Alabama	$225.00
Alaska	$186.00
Arizona	$164.00
Arkansas	$210.00
California	$171.00
Colorado	$161.00
Connecticut	$180.00
Delaware	$151.00
D.C.	$159.00
Florida	$182.00
Georgia	$212.00
Hawaii	$176.00
Idaho	$148.00
Illinois	$157.00
Indiana	$164.00
Iowa	$136.00
Kansas	$162.00
Kentucky	$157.00
Louisiana	$247.00
Maine	$148.00
Maryland	$160.00
Massachusetts	$172.00
Michigan	$181.00
Minnesota	$134.00
Mississippi	$256.00
Missouri	$172.00
Montana	$153.00
Nebraska	$143.00
Nevada	$179.00
New Hampshire	$147.00
New Jersey	$154.00
New Mexico	$180.00
New York	$173.00
North Carolina	$160.00
North Dakota	$116.00
Ohio	$162.00
Oklahoma	$226.00
Oregon	$154.00
Pennsylvania	$152.00
Rhode Island	$183.00
South Carolina	$186.00
South Dakota	$118.00
Tennessee	$187.00
Texas	$216.00
Utah	$147.00
Vermont	$151.00
Virginia	$152.00
Washington	$158.00
West Virginia	$179.00
Wisconsin	$128.00
Wyoming	$146.00
United States average	$173.00

Top 5 Most Expensive States for Renters Insurance

According to data from the Insurance Information Institute, the most expensive state for renters insurance in the nation is Mississippi. Renters in the Magnolia State pay an average of $256 per year for renter’s insurance. Let’s look at the top five:

State	Average annual premium	State ranking by cost
Mississippi	$256.00	1
Louisiana	$236.00	2
Oklahoma	$226.00	3
Alabama	$225.00	4
Texas	$216.00	5

Mississippi and Louisiana are expensive states in terms of renters insurance because of their proximity to the coast. Being right on the Gulf Coast means residents are often vulnerable since hurricanes may first make landfall in these areas. The risk of loss is higher than inland.

Oklahoma, Texas, and Louisiana all lie in the infamous “Tornado Alley,” which is a strip of states, bordered by the Dakotas to the north and Texas to the south, that is historically prone to fiercely damaging tornadoes. Combined, these factors have resulted in higher renters insurance premiums due to each location’s heightened susceptibility to wind and storm damage.

Top 5 Least Expensive States for Renters Insurance

North Dakota is the least expensive state for renters insurance in the United States, according to data gathered by the Insurance Information Institute. North Dakotans pay an average of $116 per year for renters insurance coverage.

State	Average annual premium
North Dakota	$116.00
South Dakota	$118.00
Wisconsin	$128.00
Minnesota	$134.00
Iowa	$136.00

In general, renters policies are lower in areas that aren’t subject to extreme weather (like hurricanes and tornadoes) and that have low crime rates.

What Factors Determine Cost of Renters Insurance?

The cost of your renters insurance may be influenced by a multitude of factors, the most prominent being the following:

•   Coverage limits

•   Deductible

•   Claims history

•   Location

•   Pets

•   Added coverage

Understanding these variables can go a long way towards reducing your costs and helping you choose the renters insurance policy that best suits your needs.

Coverage Limits

This is one of the key factors impacting the costs that you can control. Most insurance companies will give you a choice between higher and lower limits on your renter’s insurance policy.

Coverage limits are the maximum amounts an insurer is willing to pay in the event of a covered claim. There are different kinds of coverage (more on that below), and the limits offered usually range from as low as $10,000 in personal property coverage (the items in your home that could be damaged or lost) to as high as $500,000 in liability coverage (this be tapped if someone got injured at your house).

Generally speaking, the more insurance coverage you need, the higher your costs.

Deductible

The deductible is the other major component of your renter’s insurance costs that you can influence. In the event you file a claim, the deductible is the amount you agree to first pay out of pocket before renters insurance will kick in.

Your renters insurance deductible transfers risk from the insurer to you, when it comes to losses incurred in a covered claim. Consequently, insurers are willing to charge you a lower premium if you opt for a higher deductible, as this reduces how much they need to pay out. As you might guess, if you want a low deductible, so you would pay as little out of pocket as possible, your rates will be higher.

Depending on your insurance provider, your optional deductible will usually range anywhere from $0 to $2,000. In some instances, insurance providers will allow you to pick your deductible as a percentage of your total insurance limit, for example, if your policy limit is $10,000 and your deductible allotment is 10%, your deductible will effectively be $1,000 for each claim filed.

Claims History

Similar to your FICO score, insurance companies use what’s called a “CLUE” report (Comprehensive Loss Underwriting Exchange) to track your history when it comes to filing insurance claims. This report contains information regarding all insurance claims filed within the past 5 to 7 years, regardless of whether you move or change insurer.

Repeated claims with hefty payouts can be a red flag for insurers and result in a hike to your insurance premiums. Beware that even claims filed under other types of insurance policies, like homeowners insurance, can impact your renters insurance premium.

Location

You know that saying about the three most important things in real estate are location, location, location? Well, in terms of renters insurance, location isn’t the only thing, but it’s a major variable in terms of how much you will pay. Are you renting a cabin in the woods, in a low-crime rural area? Or are you moving into an apartment in the middle of a major city, where robberies are common? Or are you perhaps planning on signing a lease for the sweetest beach shack, just steps from the shore? The location of your rental will impact how expensive your premium is.

Behind the scenes, insurance actuaries rely on complex formulas to price your premium; these take many factors into account, including the risk of natural disasters, crime, and fire, among other factors.

Depending on how risky the insurer perceives your area to be, expect to be charged a higher premium if you live in an area that’s especially prone to crime or natural disasters.

Pets

While we all love our pet pals, it’s fairly commonplace for pet owners to be charged higher premiums if they live with a furry friend. Regardless of how sweet your pet may be, insurers deem pets a liability risk, particularly when it comes to things like bites, scratches, and damage to personal property. Your renters policy will potentially pay out if your critter bites a guest or even nips someone while you are walking it in the lobby of your apartment building.

In some instances, insurers may be unwilling to insure certain types of pets; these are typically certain breeds of dogs or exotic animals deemed “higher risk.” Check with your insurer to verify whether or not your pet is covered under your renters insurance policy.

Added Coverage

Your policy will likely include standard coverage for personal property, liability, and loss of use (meaning expenses incurred if you can’t live in your usual dwelling) offered through your standard rental insurance policy. In addition, many insurers offer a suite of optional coverages, riders, and endorsements that you can tack onto your renter’s insurance policy to best suit your needs.

Naturally, added coverage comes with added cost. However, as renters insurance is fairly affordable, it usually adds only a few dollars a month.

Depending on your personal assets, it may be worthwhile to consider some of these optional coverages. Some of the most common add-ons/endorsements/riders offered through insurers are as follows:

•   Scheduled personal property: This ups the coverage limit for a specific named item or items that would fail to be fully covered under the policy limits of your standard renters insurance.

•   Replacement cost: Typically, an insurance policy will reimburse you for the actual cash value of an item. So if your 5-year-old laptop is stolen or destroyed, you’d be paid the current value of it. With replacement cost coverage, the depreciation is eliminated from the calculation of your property’s value, resulting in a higher payout in a covered claim.

•   At-home business: This covers damages to any business equipment you have at home that isn’t covered under a standard renters policy.

•   Pet damage: This sometimes allows you to add coverage for property damage and liability caused by pets that isn’t covered under your standard renters policy. Exclusions may apply for specific breeds or types of pets.

•   Earthquake coverage: This covers damage to your property caused by an earthquake, which isn’t typically covered under renter’s insurance.

•   Identity theft: This covers costs incurred if you’re ever the victim of identity theft, as well as fees for expert assistance when it comes to restoring your identity and resolving any fraudulent activity.

What’s Covered by Renters Insurance

The majority of renters insurance policies provide the following standard coverages:

•   Personal property: This covers any loss or damage to your possessions due to a covered event, such as fire or theft.

•   Liability: This covers any property damage or bodily injury costs that you’re found liable for in the event of a covered claim.

•   Loss of use: Also known as “additional living expenses”, this covers the costs of temporary housing in the event your rental is rendered unlivable due to a covered loss.

•   Medical payments to others: This covers the medical costs of guests that are injured on your property. Unlike liability insurance, this does not require you to be legally liable for any injuries.

Most insurance providers will allow you to adjust the limits on these coverages to suit your needs. Keep in mind, this will likely impact your renters insurance costs; more coverage will probably mean higher premiums.

Recommended: What Does Renters Insurance Cover?

Do You Need Renters Insurance?

Legally, you are not required to purchase renters insurance. However it’s advisable for most individuals to purchase renters insurance, as your landlord’s homeowners insurance policy will not cover any losses or damage to your personal property; nor will it typically cover any liability for bodily injury or property damage that occurs while the property is under lease.

Certain rental properties will require you to purchase and maintain an adequate renters insurance policy as part of your lease agreement. Make sure to check with your landlord to fully understand what your contract requires.


💡 Quick Tip: Did you know that, in most states, landlords can require tenants to carry a renters insurance policy? Fortunately, the average monthly cost is just $15.

Are There Ways to Save on Renters Insurance?

There are a variety of ways you can save on your renters insurance costs, these include bundling your insurance policies under one insurer, increasing the size of your deductible, and generally staying safe and claim-free. Here’s a closer look:

•   Bundle your insurance policies: Most insurance companies offer discounts for purchasing multiple policies through the same company. Purchasing renters insurance in tandem with other policies, like life or auto insurance, can result in cumulative discounts across all your insurance policies.

•   Increase your deductible: Raising the amount of your deductible increases your share of the costs in the event of a covered claim and consequently can lower the cost of your premiums.

•   Pay your entire premium at once: Some insurance companies offer a discount for paying your entire premium upfront as one annual payment rather than in monthly or quarterly installments. Check with your provider to see if they offer lump sum payment discounts.

The Takeaway

Renters insurance is relatively inexpensive when compared to other types of coverage, like homeowners, auto, or health insurance. However, it can prove invaluable in the event of any emergency that occurs on your rental property.

It’s a good idea to purchase a renters insurance policy when renting a home. Remember that your landlord’s homeowners insurance policy typically only covers their interests and generally will not reimburse your costs in the event of any incidents. Imagine losing all your possessions, or even just all of your clothes, to a fire. Or having a burglar break in and steal your electronics. Renters insurance can help minimize the pain by helping pay for you to replace what you’ve lost. That kind of peace of mind is well worth the usually inexpensive premiums these policies charge.

The Takeaway

Renters insurance is relatively inexpensive when compared to other types of coverage, like homeowners, auto, or health insurance. However, it can prove invaluable in the event of any emergency that occurs on your rental property.

It’s a good idea to purchase a renters insurance policy when renting a home. Remember that your landlord’s homeowners insurance policy typically only covers their interests and generally will not reimburse your costs in the event of any incidents. Imagine losing all your possessions, or even just all of your clothes, to a fire. Or having a burglar break in and steal your electronics. Renters insurance can help minimize the pain by helping pay for you to replace what you’ve lost. That kind of peace of mind is well worth the usually inexpensive premiums these policies charge.

Looking to protect your belongings? SoFi has partnered with Lemonade to offer renters insurance. Policies are easy to understand and apply for, with instant quotes available. Prices start at just $5 per month.

Explore renters insurance options offered through SoFi via Experian.

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Photo credit: iStock/dragana991

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