Can You Deduct Mortgage Interest on a Rental Property?

Yes. Interest you pay on a mortgage for a rental property is a rental expense you deduct on Schedule E, and it reduces your taxable rental income. It is not limited by the $750,000 home-mortgage cap, because that cap applies to home mortgage interest on your main home and second home, not to interest on a property you rent out.

The details matter more than the headline: which part of the payment is interest, how points and loan fees are handled, what happens when you refinance or pull cash out, and how the rules change if you also use the place yourself. This guide walks through each one.

The basic rule

IRS Publication 527 says it plainly: "You can deduct mortgage interest you pay on your rental property." On the Schedule E instructions, interest paid to banks or other financial institutions goes on line 12, and deductible mortgage interest paid to anyone else (for example, a seller-financed note, or a loan where you didn't get a Form 1098) goes on line 13.

Only the interest is deductible. A typical monthly payment bundles several things together:

If you want to see how much of each payment is interest, run the loan through the mortgage amortization calculator. Early in a 30-year loan, most of each payment is interest; that share shrinks every year.

Form 1098

Per Publication 527, if you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or a similar statement. That form is your main record, but check it: if a co-borrower received the 1098 and you paid your share, Publication 527 says you report your share on line 13 and attach a statement showing who received the form.

Why the $750,000 cap doesn't apply

IRS Publication 936 covers home mortgage interest, the itemized deduction on Schedule A. It limits that deduction to interest on the first $750,000 of home acquisition debt ($375,000 if married filing separately), with a $1 million limit for debt incurred before December 16, 2017. Those limits apply to a "qualified home," which Pub 936 defines as your main home or your second home.

A property you rent full time is neither. Its interest is a rental expense on Schedule E, and Pub 936 refers readers to Publication 527 for residential rental property. So a landlord with a $900,000 loan on a fourplex deducts the interest on the whole loan as a rental expense (subject to the usual passive activity rules), not just the first $750,000.

Points and loan costs

Not every closing cost on a rental loan is deductible interest.

Points. Publication 527 treats points that are solely for the use of money as prepaid interest, and says you generally can't deduct the full amount in the year paid. Instead you deduct them over the life of the loan under the original issue discount (OID) rules. The Schedule E instructions say the same: points, including loan origination fees, charged only for the use of money must be deducted over the life of the loan. Pub 527 has a de minimis rule: if the OID is less than one-fourth of 1% of the stated redemption price at maturity, you have more options for when to deduct it.

Other loan costs. Publication 527 says certain expenses you pay to obtain a mortgage on rental property, such as mortgage commissions, abstract fees and recording fees, can't be deducted as interest. They are capital expenses that become part of your basis in the property, which means you recover them through depreciation or when you sell.

Worked example (hypothetical). Say you buy a $300,000 rental with a $240,000, 30-year loan and pay $2,400 in points. You don't deduct $2,400 in year one. You spread it over the 30-year term under the OID rules. That averages about $80 a year, though the exact yearly amount depends on the method your preparer uses (at 1% of the loan, these points are above the de minimis threshold). If you sell or refinance with a different lender in year 6, Publication 527 says you may be able to deduct the remaining unamortized points in the year the loan ends.

Refinancing and cash-out loans

Refinancing a rental loan doesn't change the basic rule: interest on the new loan is deductible to the extent the money is tied to the rental. Three points from Publication 527 to keep in mind:

• Leftover points from the old loan. When a loan ends early through refinancing, prepayment or foreclosure, you may be able to deduct remaining points in that year. But if you refinance with the same lender, the remaining points generally aren't deductible in the year you refinance; they may be deductible over the new loan's term.
• New points. Points on the new loan are amortized over the new loan's term, the same way as on a purchase loan.
• Cash out for personal use. If you refinance for more than the old balance and use the extra for something personal, the interest on that extra portion generally can't be deducted as a rental expense. Pub 527's own example uses part of a refinance to buy a car: the points and interest on that part are nondeductible personal interest.

Interest tracing: the loan follows the money

Cash-out refinances are where the tracing rules matter. Under Treasury Regulation §1.163-8T, "Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures." The regulation also says the allocation isn't affected by which property secures the loan.

In practice that cuts both ways:

• A loan secured by your rental, with proceeds spent on a vacation, produces personal interest, not rental interest.
• A home equity loan on your own house, with proceeds traced to buying or improving a rental, can produce rental interest.

The Schedule E instructions put it simply: you allocate interest on a loan the same way you allocate the loan proceeds, and you must have records showing how the proceeds of each debt were used. Keep loan proceeds in a separate account until they're spent, and keep the closing statement and the bank trail that shows where the money went.

If you also use the property yourself

Vacation homes and units you occasionally use follow different rules under Publication 527, chapter 5.

When the property counts as your home. You are treated as using a dwelling unit as a home if your personal use is more than the greater of 14 days or 10% of the days it is rented at a fair rental price. The Schedule E instructions use the same test. Pub 527 also says a day spent working substantially full time on repairs and maintenance (not improvements) isn't a personal-use day.

Splitting interest between rental and personal use. Publication 527 says to divide expenses between rental use and personal use based on the number of days used for each purpose. The rental share of mortgage interest goes on Schedule E; only the personal share can go on Schedule A, and only under the Pub 936 rules.

When the home test is met. If the unit counts as your home and rental expenses exceed rental income, the excess generally can't offset other income. Pub 527's worksheet applies expenses in order: the rental share of mortgage interest, real estate taxes and direct rental costs first; then operating expenses up to the remaining rent; then depreciation. Disallowed amounts carry forward.

Rented fewer than 15 days. If you use the unit as a home and rent it for less than 15 days during the year, Pub 527 says that rental isn't treated as rental activity: you don't report the rent, you don't deduct rental expenses, and mortgage interest and property taxes go on Schedule A as normally allowed.

The business interest limit (§163(j))

Most small landlords won't run into the business interest limitation, but it's worth knowing it exists. The Schedule E instructions say interest on rental real estate is not subject to the limitation on business interest unless your rental real estate activity is a trade or business, and even then you report all deductible interest on lines 12 and 13 if you meet a Form 8990 filing exception.

The main exception is the small business taxpayer test. The Form 8990 instructions (revised 12/2025) set the 2025 threshold at average annual gross receipts of $31 million or less for the 3 prior tax years, and note that the figure is adjusted for inflation in later years. Larger real estate businesses can make an irrevocable "electing real property trade or business" election, which then requires the alternative depreciation system for residential rental property. If you're near that territory, it's a conversation for your CPA.

Records to keep

The deduction is only as good as the paper trail behind it:

• ☐ Each year's Form 1098 (or lender statement) for every rental loan
• ☐ Closing disclosures for the purchase and every refinance, showing points and loan fees
• ☐ An amortization schedule for any points you're deducting over time
• ☐ For cash-out refinances and home equity loans, bank records showing exactly where the proceeds went
• ☐ A day count of rental days and personal days for any property you also use
• ☐ Records kept by property, not lumped together

For a full picture of what else goes on Schedule E alongside interest, see the complete guide to landlord tax deductions. To see how interest affects a property's cash flow, plug your loan into the rental property calculator. If property taxes are your other big carrying cost, the property tax appeals guide covers how to challenge an assessment that looks too high.

This post reflects the IRS publications for tax year 2025 returns, the latest available when it was checked. Have a tax professional review anything unusual, especially cash-out refinances, mixed-use properties and loans shared with other owners.

Sources

All sources checked 2026-10-26.

• IRS Publication 527, Residential Rental Property
• IRS Publication 936, Home Mortgage Interest Deduction
• IRS Instructions for Schedule E (Form 1040)
• IRS Instructions for Form 8990
• Treas. Reg. §1.163-8T, Allocation of interest expense (Cornell LII)