How Do You Deduct Mortgage and Other Loan Interest?

Interest on money you borrow to buy, improve, or run a rental is a rental expense. You deduct it on Schedule E (Form 1040), line 12 for a mortgage with a bank or other lender and line 13 for other interest, in the year you pay it. It is not limited by the $750,000 cap on home mortgage debt, and you do not need to itemize. What decides whether interest counts is how you spent the borrowed money, not which property secures the loan.

How is rental interest different from home mortgage interest?

Two limits still apply to rental interest. First, if your rental expenses exceed rent, the passive loss rules can delay the loss, including the interest in it. See what rental expenses landlords can deduct for the $25,000 allowance and how it phases out. Second, the business interest limit applies only if your rental activity is a trade or business and you do not meet a filing exception in the Form 8990 instructions. The small business exception covers taxpayers with average annual gross receipts of $31 million or less over the prior 3 years (the 2025 figure, adjusted yearly for inflation), so it rarely reaches an owner of a few units.

If you live in one unit of a duplex and rent the other, split the interest. For equal-size units with $10,000 of interest for the year, $5,000 goes on Schedule E and $5,000 is home mortgage interest on Schedule A.

How does the IRS decide what interest belongs to the rental?

The IRS uses interest tracing: you allocate interest on a loan the same way you spent the loan money. Under the IRS tracing regulation (26 CFR 1.163-8T), these common cases work out as follows:

• Purchase mortgage on the rental. The interest is rental interest on line 12. The lender's Form 1098 shows the amount if you paid $600 or more.
• Cash-out refinance of the rental. Interest on the original balance stays rental interest. Interest on the extra cash follows what you bought with it. If you refinance a $100,000 balance into a $120,000 loan and spend the $20,000 on a personal car, about one-sixth of the interest is personal and not deductible.
• Home equity loan or line of credit on your home, spent on the rental. If you use the money to buy, repair, or improve the rental, the interest is rental interest, reported on line 13 because the loan is not a mortgage on the rental. Publication 936 also lets you choose to treat that debt as not secured by your home, which keeps it from using up your home loan limit. The choice continues in later years unless the IRS agrees to revoke it.
• Credit cards. Interest on card balances from rental charges, such as appliances or a repair bill, is rental interest. If one card carries both personal and rental charges, you must be able to show which balance generated the interest.
• Seller financing or a private lender. The interest is deductible on line 13 if the lender is not a bank or you did not receive a Form 1098.
• Car loan. If you use a car partly for the rental, deduct the rental-use share of the loan interest on Schedule E. The same interest cannot also be claimed elsewhere on your return.
• Renovation loans. Interest on a loan used to improve the rental is rental interest. The improvement itself is depreciated, not deducted. See how home renovation loans work for loan types.

Tracing is easiest when loan money goes into its own account. Under 26 CFR 1.163-15, you may treat spending from any of your accounts or cash as paid with the loan, up to the amount borrowed. The spending must occur within 30 days before or after the loan money is deposited in any of your accounts or received in cash. Keep closing statements and draw records for each loan.

Prepaid interest is not deductible when you pay it. You deduct it in the year it covers.

How do you deduct points and other loan costs?

Points, including loan origination fees and discount points, are prepaid interest. On a rental loan you deduct them over the term of the loan, not in the year paid. The full-year deduction available for points on a main home purchase does not apply to a rental.

Example from IRS Publication 527: you pay $1,500 in points on a $100,000, 30-year rental loan. The points count as small enough (de minimis) when they are less than 0.25% of the amount due at maturity times the number of full years to maturity, here $100,000 × 0.0025 × 30 = $7,500. Because $1,500 is under that, you can deduct them in equal amounts, $50 a year for 30 years. Larger points must be deducted under the constant-yield method, which ties each year's deduction to the loan's interest schedule.

When the loan ends early because you sell, pay it off, or refinance with a different lender, you deduct the remaining points that year. If you refinance with the same lender, the remaining points are generally spread over the new loan instead. Points tied to cash-out money spent on personal items are not deductible, the same as the interest.

Other closing costs fall into two groups:

See how capital expenses are treated for how basis and depreciation work.

Is mortgage insurance on a rental loan deductible?

Yes. The IRS says you can deduct private mortgage insurance (PMI) premiums on a rental property loan in the year you pay them, on Schedule E, line 9 (insurance), not as interest. If you prepay premiums for more than one year, deduct only the part that applies to each year of coverage. This treatment does not depend on the home mortgage insurance rules, because the premium is a cost of the rental.

Where do you report it, and what records do you need?

1. Enter interest on a rental mortgage paid to a bank or other financial institution on line 12. If you paid more than the Form 1098 shows, enter the full deductible amount and attach a statement explaining the difference.
2. Enter other rental interest, such as a home equity loan spent on the rental, a private lender, or credit card interest, on line 13.
3. If you and a co-borrower other than your spouse paid the mortgage and the 1098 went to the other person, report your share on line 13 with a statement giving that person's name and address.
4. Keep a schedule for each loan showing the amount borrowed, what it paid for, and annual interest, plus the points schedule if you are deducting points over time.

For the other expenses that go on the same Schedule E, see the full list of rental operating expense deductions.