Can You Deduct Mortgage Interest on Rental Properties?

Owning rental properties offers various tax benefits, including the ability to deduct mortgage interest on those properties. This deduction allows landlords to potentially reduce their taxable rental income by the amount of interest paid on the mortgage, potentially leading to significant tax savings. To qualify, the property must be rented out or available for rent, and you must keep detailed records of mortgage payments. Consulting with a tax professional can provide more guidance on maximizing this deduction and ensuring compliance with IRS regulations.

A financial advisor can discuss your tax strategy as part of your overall financial planning.

Deducting Mortgage Interest on Rental Properties

When you own rental properties, you qualify for a mortgage interest deduction from your rental income, potentially reducing your taxable income. This applies to mortgages on primary residences also used as rentals, mortgages on second homes that are rented out, and even home equity loans on rental properties if the funds are used for substantial property improvements.

How to Claim the Mortgage Interest Deduction

Claiming the mortgage interest deduction on rental properties can potentially significantly reduce your taxable income, but it requires careful documentation and adherence to IRS guidelines.

Here’s a step-by-step process to help you claim this deduction effectively:

Confirm eligibility: Ensure the property is a rental property, meaning it is used to generate rental income. The mortgage must be a secured debt on this property.
Keep thorough records: Maintain accurate records of all mortgage payments made throughout the year. This includes keeping mortgage statements and payment receipts.
Confirm receipt of Form 1098: Your lender will typically provide a Form 1098 at the end of the year, which outlines the amount of mortgage interest paid. This form is necessary to report accurately the interest deduction.
Complete schedule E: Report the mortgage interest paid on Schedule E (Form 1040), “Supplemental Income and Loss.” This form is used to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts and residual interests in REMICs.
Record your deductible amount: Enter the total amount of interest paid during the tax year on Line 12 of Schedule E. Ensure that you are only deducting the interest portion of your mortgage payments, not the principal repayment, and only the portion that applies to the rental space if you also occupy the residence.

Other Rental Property Deductions

A couple looking up rental property deductions.

Owning rental properties comes with a range of other deductions that can potentially significantly lower taxable income. Beyond the mortgage interest deduction, property owners can benefit from several other landlord tax breaks.

Depreciation

One of the most substantial deductions is depreciation. The IRS allows property owners to depreciate the value of their rental property over 27.5 years, accounting for wear and tear, while commercial properties depreciate over 39 years. This non-cash deduction may provide a considerable tax benefit annually.

Property Taxes

Property taxes paid to local governments are deductible. This can be a significant deduction depending on the property’s location and the local tax rates.

Repairs and Maintenance

Costs associated with repairs and regular maintenance are fully deductible in the year they are incurred. This includes expenses for fixing leaks, painting and other minor repairs that keep the property in good condition.

Insurance Premiums

Premiums paid for insurance coverage on rental properties are deductible. This includes fire, theft and flood insurance, as well as landlord liability insurance. The deduction applies to premiums for the year in which they are paid.

Utilities

If the property owner pays for utilities like electricity, gas, water or trash collection, these expenses are deductible. The costs must be directly related to the rental activity and paid by the owner.

Other Expenses

Fees paid to accountants, lawyers, and other professionals for services related to the rental property are deductible. This ensures that the landlord can offset the cost of obtaining professional advice and services.

Expenses related to advertising the rental property, including online listings, newspaper ads and other promotional activities, are deductible. This helps landlords manage the costs of finding tenants.

Landlords can deduct travel expenses related to managing their rental properties. This includes trips to the property for inspections, maintenance or tenant meetings. If the property is out of state, these deductions may include airfare, car rentals and hotel stays.

What’s Not Deductible?

However, there are limitations on tax deductions and understanding them is key. Rental property owners cannot deduct the following:

Improvements: Costs for improvements, such a new roof or remodeling, must be capitalized and depreciated over time rather than fully deducted in the year they are incurred.
Losses from vacant property: You can’t deduct lost income due to vacancy, though you can deduct maintenance expenses during the vacancy period.
Fines and penalties: Any fines or penalties paid to the government for violating laws, such as building code violations, are not deductible.
Owner’s labor: You cannot deduct the value of your own labor if you perform work on the property. For instance, if you spend time painting the property or handling maintenance tasks, you cannot deduct a value for your labor.
Loan principal payments: The principal portion of mortgage payments is not deductible. You can only deduct the interest.

The Hidden Cost of Depreciation and Passive Loss Limits

Depreciation appears to be a gift from the IRS. You deduct $30,000 annually for wear and tear on a property you didn’t actually spend money on, reducing your taxes by approximately $7,200 if you’re in the 24% tax bracket. That feels like a win. When you sell the property, the IRS collects that gift back through recapture tax at a flat 25% rate. That $30,000 in depreciation deductions becomes a $7,500 tax bill at sale. You haven’t saved money; you’ve delayed it and made it more expensive.

Consider a landlord who buys a $400,000 rental property (excluding land). Over 27.5 years, they depreciate roughly $14,545 annually. That creates approximately $3,491 in annual tax savings at the 24% bracket. After 10 years, they’ve accumulated $34,910 in depreciation deductions and saved roughly $8,378 in taxes. When they sell, the IRS taxes that $34,910 in accumulated depreciation at 25%, creating a $8,728 recapture bill. The net outcome: they saved $8,378 but owe $8,728, for a net cost of $350 on the deal. And that’s before accounting for the time value of money.

The real harm comes when you sell after 20 or 30 years of depreciation. $70,000 or more in accumulated depreciation triggers a $17,500 to $20,000 recapture tax bill when you exit. Many landlords don’t plan for this and face unexpected tax liability at the worst possible time.

Added Costs for High-Incomes

Passive loss limitations create a second barrier to rental property deductions. If your adjusted gross income exceeds $100,000 (for single filers) or $150,000 (for married filing jointly), you cannot deduct passive losses from rental properties to offset other income. This means if your rental property generates a $15,000 loss in a given year and your income from your job is $120,000, you can’t use that $15,000 loss to reduce your taxable income. The loss carries forward and may never be useful unless your income drops below the threshold or you eventually sell the property.

High-income professionals and business owners frequently hit these limits. A physician earning $250,000 with a rental property loss cannot deduct a dime of it. They’re paying full taxes on $250,000 in income while the property loss sits unused. This completely eliminates the tax advantage that lower-income landlords enjoy.

The math changes dramatically depending on your situation. A landlord earning $80,000 with $15,000 in rental losses saves approximately $3,600 in federal taxes by deducting the loss against other income. They’re below the passive loss threshold, so the deduction works. A landlord earning $180,000 with the same $15,000 loss saves nothing because the passive loss limit eliminates the deduction entirely. Same property, same loss, wildly different tax outcomes based on total income.

Before celebrating rental property deductions, calculate your cumulative depreciation and plan for recapture tax. If you’re above the passive loss income threshold, understand that annual losses won’t reduce your tax bill. Rental properties offer genuine tax benefits, but only for landlords in the right income range and only when you account for the deferred recapture liability at sale.

Bottom Line

Rental property owners researching how to claim a mortgage interest deduction.

Maximizing tax benefits from owning rental properties involves leveraging deductions such as mortgage interest, depreciation, property taxes and other related expenses. Properly documenting and understanding eligibility criteria for these deductions can potentially significantly reduce your taxable income, enhancing the potential growth of your investments.

Tips for Tax Deductions

When you own a rental property, your taxes can get complex, fast. A financial advisor may be able to help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve you financial goals, get started now.
Make sure you’re deducting all allowable rental property expenses to cut down on your tax bill. Some expenses are easy to overlook, so check out these nine rental property tax deductions to ensure you haven’t missed them.