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. And you are required to report rental income on income tax returns. Fortunately, mortgage interest can be deducted against your taxable income, providing you with at least some relief.

Rental property owners can learn more about what rental property tax 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 rental property tax deductions 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 rental property tax deductions on your property 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.

You can’t take the HMID on your rental properties as a landlord or rental property owner. But that’s actually a good thing because you can deduct the mortgage interest on your rental property as a business interest expense 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 from a rental property loan is considered a business expense which is deductible on Schedule E (Rental Property Income and Expenses). This mortgage interest deduction 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.

Note: You can only deduct the interest portion of the loan, 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 used in your rental business, not your personal residence. 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 of all tax deductions at the ready in case you need them.

  • You occupy part of the property

Let’s say you own a detached home in Indiana 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 by 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 rental 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 rental property for short-term rentals, you can only claim the days the rental 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 property 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 property 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 from your rental income deduction on your Schedule A.

  • A residential rental property like 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 your rental properties were available for rent. If you rented out the home for four weeks of the year, you could deduct 4/52 (7.7%) of the mortgage interest from your rental income.

  • 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 property, 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 actual expenses and tax deductions associated with being a landlord or rental property owner, 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 property income and reduce your property taxes bill.

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

For the most part, you can deduct all of your rental property expenses against your rental income, including rental 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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1. Can you deduct mortgage interest on rental property?

Yes, as a rental property owner, you can deduct mortgage interest on your rental property. This is one of the main rental property deductions available, which can help reduce your taxable income.

2. Is there a limit on mortgage interest deduction for rental property?

Yes, there can be a limit on mortgage interest deductions for rental property, especially if you have high-income or own multiple properties. It's important to consult with a tax professional to understand any limitations specific to your situation and to ensure you're taking advantage of the full scope of rental property deductions available to you.

3. Are there any rental property expenses that are not tax-deductible?

While many expenses can be deducted, such as the rental property mortgage rate interest and maintenance costs, not all expenses related to rental property are tax-deductible. Capital improvements, for example, are not immediately deductible but are typically depreciated over time. Always consult a tax expert to know all allowable rental property deductions.

4. Do I need to pay taxes on rental income?

Yes, as a taxes rental property owner, you are required to report rental income on your tax return. However, you can also claim rental property deductions to offset this income, including expenses such as property management fees, maintenance costs, and mortgage interest.

5. What types of expenses can be considered rental property deductions?

Rental property expenses like advertising, insurance, and maintenance are deductible. The interest on a mortgage for rental property, influenced by the rental property mortgage rate, is also deductible. It's important for taxes rental property owners to consult professionals for all potential deductions.

6. Can I get a mortgage for a rental property?

Absolutely! Obtaining a mortgage for rental property is a common way investors purchase real estate to rent out. However, the rental property mortgage rate might be slightly higher than for a primary residence due to the perceived increased risk associated with rental properties. It's crucial to shop around for the best rates and terms when seeking a mortgage for a rental property.

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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.
The Landlord’s Guide to Deducting Rental Property Mortgage Interest
The Landlord’s Guide to Deducting Rental Property Mortgage Interest