The Landlord’s Guide to Deducting Rental Property Mortgage Interest

The Landlord’s Guide to Deducting Rental Property Mortgage Interest

When you’re a landlord or rental property owner, you have a lot of big expenses – not the least of which is interest paid on rental property mortgages and loans. Fortunately, that interest can be deducted against your taxable income, providing you with at least some relief. Learn about what deductions you can and can’t take and how to deduct your interest in this guide to deducting rental property mortgage interest.

You can also find out more tax rules that save you money in our guide to the 10 Tax Deductions you can Claim as a Landlord (includes Property Taxes, Operating Expenses, Business Expenses, Services, Legal Fees, and more).

1. What is the Mortgage Interest Deduction (HMID)?

As a homeowner, you can elect to itemize rather than take the standard deductions on your taxes, and claim the interest on the first $750,000 of mortgage principal you’ve borrowed on your Schedule A. Depending on your circumstances, the home mortgage interest deduction can save you a significant amount on your income taxes.

As a landlord, you can’t take the HMID on your rental properties. But that’s actually a good thing, because you can deduct the mortgage interest on your rental properties as business interest on your Schedule E. This offers much more flexibility and doesn’t require you to itemize your Schedule A.

2. Is Mortgage Interest Tax Deductible on Investment Properties?

One of the tax benefits of real estate investing is that your mortgage interest is considered a business expense. You can deduct it on your Schedule E (Rental Income and Expenses) when the loan has been used for a rental property you’re renting out. This effectively lowers your taxable income on your 1040 (personal) return. All types of home loans can be deducted, including conventional mortgages, nonconforming home loans and FHA loans. Only the interest portion of the loan can be deducted, not the principal.

3. How Much Mortgage Interest is Deductible?

You can deduct all the interest you paid on a mortgage for your rental property, with a few exceptions:

  • The mortgage doesn’t support your rental business

You can only deduct mortgage interest for loans that were used in your rental business, so a mortgage on the home you live in can’t be deducted. The IRS could ask for records showing how the loan was used and will be displeased if you haven’t followed their strict rules about how the money needs to be traced. Use rental property bookkeeping software to keep track of all your expenses so you can stay organized at tax time and have records at the ready in case you need them.

  • You occupy part of the property

If you own a detached home and rent out a basement apartment, you can only deduct the portion of interest that covers the basement. The simplest way to calculate this is using the floor area of the home. If the basement unit comprises 1/3 of the square footage, you can deduct 1/3 of your mortgage interest as an expense.

For example, if the home had a total floor area of 3,000 square feet, and you rented out the 1,000 square-foot basement suite, the rented portion of the home would be 33.3% (1000 sq-ft / 3000 sq-ft = 33.3%). If your annual mortgage interest paid for the home was $12,000, you could deduct $4,000 as an expense ($12,000 x 33.3% = $4,000).

You may still be able to deduct the interest on your personal portion of the mortgage on your Schedule A.

  • The property wasn’t available for rent for the entire year

The same is true if the unit was only available for rent for part of the year. If you own a condominium and began renting it out on July 1st, you would only be able to deduct half of the mortgage interest you paid that year. If you use your property for short-term rentals, you can only claim the days the property was actually available for rent (even if you didn’t have a renter on all of those days).

  • The mortgage interest doesn’t apply to the current tax year

IRS rules state that you can only deduct interest in the year it was applied, which is not necessarily the year it was paid. Money spent on points and origination fees must be deducted over the life of the loan, even if they were paid upfront.

4. Is Mortgage Interest on a Second Home Deductible?

If you own a second house that you use as your residence, you may be eligible to take the HMID on your Schedule A. You can only deduct the interest on a second home on your Schedule E, however, if it’s being used for rental activity. Here are a few examples:

  • A vacation home used exclusively by you and your family

Since the vacation home isn’t being rented out, you can’t deduct the mortgage interest from your rental income on your Schedule E, however you may be able to use the personal mortgage interest deduction on your Schedule A.

  • A vacation home used by your family and rented on Airbnb a few weeks out of the year

In this case, you can deduct the mortgage interest only on the days the property was available to be rented. If you rented out the home 4 weeks of the year, you would be able to deduct 4/52 of the mortgage interest, or 7.7%.

  • A home with a basement apartment in a city to which you frequently travel

You can claim the mortgage interest on the portion of the home you’re renting out, typically determined by square footage. If you use the 800 sq-ft basement and rent out the 1200sq-ft main house, you can deduct 8/20 of the mortgage interest, or 40%.

5. Can I Deduct Interest From Other Types of Loans?

As long as a loan is taken to pay for expenses related to your rental properties, you can claim the interest alongside any mortgage interest to lower your taxable rental income. Because your real estate business is considered a business, you can claim the interest paid on any rental property loans, from bank loans to lines of credit, and even credit cards as long as you can prove the money was used for your rental properties.

Rental Property Interest Deductions at a Glance

DeductableNot deductable
Interest on loans that support your rental business Interest on loans for your own home
Interest for the days the property was available for rent, even if you didn’t have a tenant Interest for the days the property was not available for rent
Interest for the portion of your owner-occupied home that you rent outInterest for the portion of your owner-occupied home that you live in
Interest on loans that was applied within the tax yearPrepaid interest such as points and origination fees
Interest on a second home that’s rented outInterest on a second home for personal use
Interest on conventional and unconventional mortgages, private home loans, home equity lines of credit, unsecured loans and lines of credit, and credit cards when the money borrowed is used in your rental business.Interest on loans when the money is not used in your rental business.

Final Thoughts: Tax Deductions for Rental Property Mortgages

There are lots of expenses associated with being a landlord, and mortgage interest is typically one of the largest expenses you will have. Fortunately, you can deduct your mortgage interest as an expense on your Schedule E to lower your rental income and reduce your tax bill.

As a landlord, you can only deduct the mortgage interest that is specifically related to your real estate business. Just as you can’t deduct the cost of your personal expenses, you can’t deduct interest on mortgages for your own home. However, you may be able to deduct your personal mortgage interest on your Schedule A using the Home Mortgage Interest Deduction.

For the most part, all of your rental property expenses can be deducted against your rental income, including property taxes, the cost of advertising, insurance, maintenance and even travel.

If you’re renting a separate unit in an owner-occupied home, such as a basement apartment, you can deduct a fraction of your mortgage interest equal to the fraction of the home that’s rented out. For example, if your rented basement apartment comprises ¼ of the home’s square footage, you can deduct ¼ of your mortgage interest on your Schedule E. You may also be able to take the HMID on your Schedule A for the remainder of your interest expense.

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FAQs

Why isn’t all Mortgage Interest deductible?

As a landlord, you can only deduct the mortgage interest that is specifically related to your real estate business. Just as you can’t deduct the cost of your personal expenses, you can’t deduct interest on mortgages for your own home. However, you may be able to deduct your personal mortgage interest on your Schedule A using the Home Mortgage Interest Deduction.

What other expenses are tax deductible?

For the most part, all of your rental property expenses can be deducted on your taxes, as long as they’re necessary and reasonable. You can deduct the cost of advertising, insurance, property tax, maintenance and even travel.

How much mortgage interest can I deduct if I also live in the home?

If you’re renting a separate unit in an owner-occupied home, such as a basement apartment, you can deduct a fraction of your mortgage interest equal to the fraction of the home that’s rented out. For example, if your rented basement apartment comprises ¼ of the home’s square footage, you can deduct ¼ of your mortgage interest on your Schedule E. You may also be able to take the HMID on your Schedule A for the remainder of your interest expense.

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Financial Technology, Real Estate Investing, and Property Management, Accounting and Tax, Finance
Saad started his career as a Certified Public Accountant (CPA) working for a top-tier accounting firm. He was responsible for helping audit alternative investment funds. He later worked at a hedge fund where he was responsible for preparing financial statements and implementing new technology. He also ran a successful private tax practice for five years.

After completing his MBA at Duke, Saad joined The Boston Consulting Group to do management consulting. At BCG his experience spanned several industries and growth projects across Pharma, Retail, and Technology companies. His passion for democratizing finances led him to Plaid, a fintech, where he worked with large Banks and Financial Institutions to make finances and money easier for all.
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