Can I Claim Mortgage Interest on Rental Property?

Yes, you can deduct the mortgage interest on a rental property. It comes off your rental income as a business expense on Schedule E of your Form 1040, not on Schedule A where homeowners deduct interest on a personal residence.¹ That placement matters: the interest reduces your rental profit directly, dollar for dollar, before any of the passive-loss or mixed-use rules kick in.

Who Qualifies to Take the Deduction

Two things have to be true before any interest is deductible. You must be legally obligated on the loan, and the loan must be secured by the rental property through a recorded mortgage or deed of trust.²³ Paying someone else’s mortgage on their behalf doesn’t earn you the deduction.

The property itself has to be held to produce income and rented at a fair market price, meaning what an unrelated tenant would willingly pay. If the unit sits vacant and you aren’t actively trying to rent it, the IRS can disallow interest for that stretch.⁴

What Kinds of Interest Count

The deduction covers more than the interest line on your monthly payment.

Purchase and Refinance Interest

Interest on the loan you used to buy the property is the core deduction. If you refinance, interest on the new loan stays deductible up to the balance you paid off. Anything you borrow beyond that balance is treated separately, based on what you do with the extra money.⁴

Improvement Loan Interest

Take out a home equity loan or a second mortgage to pay for a new roof or a kitchen remodel, and the interest is deductible as a rental expense. The improvement itself isn’t; that cost is capitalized and recovered through depreciation.⁵

Points and Loan Fees

Points paid to get or refinance a rental mortgage are prepaid interest. Unlike points on a primary residence, you can’t deduct them all in the year you pay them. They spread across the life of the loan.⁴ If the loan ends early through a sale, a payoff, or a foreclosure, you deduct whatever points are still unamortized in that final year. One exception: refinancing with the same lender rolls the leftover points into the new loan term instead.⁶

Credit Card Interest for Rental Expenses

Interest on a credit card used only for rental purchases, like materials for a repair, is deductible. Personal credit card interest isn’t. Keeping a dedicated card for the property makes this easy to defend.⁷

Mortgage Insurance Premiums

PMI and FHA mortgage insurance on a rental are deductible, but as insurance on Line 9 of Schedule E, not as interest. If you prepaid premiums that cover more than one year, only the portion for the current year is deductible.⁸

The Construction Boundary

Interest you pay on a construction loan while the rental is being built generally cannot be deducted currently. Federal law requires you to capitalize construction-period interest into the cost of the property and recover it through depreciation once the unit is placed in service.⁹

When a Big Interest Deduction Creates a Loss

Interest can be fully deductible against rental income and still leave you with a loss on paper. Whether you can use that loss against your salary or investment income depends on the passive activity rules. Rental real estate is treated as a passive activity by default, and passive losses generally offset only passive income.¹⁰

The $25,000 Active Participation Allowance

If you actively participate in managing the property, making decisions about tenants, leases, and repairs, you can deduct up to $25,000 of rental loss against non-passive income each year. The allowance shrinks by $1 for every $2 your modified adjusted gross income exceeds $100,000, and it disappears once MAGI hits $150,000.¹⁰ Married filing separately, if you lived with your spouse at any point in the year, cuts the allowance to $12,500 and starts the phase-out at $50,000.¹¹

Real Estate Professional Status

Qualify as a real estate professional and the passive rules don’t apply to rentals you materially participate in. The bar is high: more than 750 hours during the year in real property businesses in which you materially participate, and that time has to be more than half of all your work in any trade or business for the year. Employee hours in real estate don’t count unless you own more than 5 percent of the employer.¹¹

Losses You Can’t Use This Year

Anything the passive rules disallow carries forward. You can use it against passive income in a later year, or take the accumulated balance in full when you sell the property in a fully taxable transaction.

If You Also Use the Property Yourself

Personal use of a rental complicates the deduction. The IRS treats the property as a personal residence for the year once you use it personally for more than the greater of 14 days or 10 percent of the days it was rented at a fair price. Cross that line and your deductible rental expenses, mortgage interest included, are capped at your gross rental income for the property, and every expense has to be prorated between personal and rental days.¹²

The rental fraction is days rented at a fair price divided by total days of use. A property rented 200 days and used personally for 50 gives you 200 ÷ 250, or 80 percent. Only 80 percent of the mortgage interest counts as rental interest; the rest follows the rules for a personal second home.

Renting to Family

Charging a relative below-market rent is a hidden trap. Any day the property is occupied by someone paying less than a fair rate counts as a personal-use day for you, the owner.⁴ Those days stack quickly and can flip the property into personal-residence status, capping your deductions at gross rental income. Charging a relative what an unrelated tenant would pay is the only way to keep the property fully in rental territory.

Refinancing and Cash-Out: Interest Tracing

Federal regulations classify interest based on how you actually spend the borrowed money, not by what secures the loan. This matters when you refinance for more than the old balance and pocket the difference. Interest on the portion that replaced the prior balance stays a rental expense. Interest on the excess follows the cash.⁴

Spend the extra proceeds on improving the rental, and that interest remains a rental deduction. Buy stocks with it, and the interest becomes investment interest. Use it for personal expenses, and it’s nondeductible personal interest.¹³ Documenting where refinance money went is the only way to support your allocation later.

How to Report It on Schedule E

Rental mortgage interest goes on Schedule E, Part I. There’s a separate column for each property.

Line 12 is for mortgage interest paid to banks and other financial institutions. This is the figure from Box 1 of your Form 1098.¹⁴
Line 13 is for other interest, including interest paid to a seller who financed the purchase or any mortgage interest for which no Form 1098 was issued. Put the recipient’s name and address on the dotted line next to Line 13.¹⁴

If your rental expenses exceed rental income and the passive rules come into play, you may also need Form 8582 (Passive Activity Loss Limitations). You can skip it only if all of the following are true: your only passive activities are rentals in which you actively participated, you have no prior-year disallowed losses, your total rental loss is $25,000 or less, and your MAGI is $100,000 or less.¹⁵ If any of those is off, Form 8582 sets how much of your loss you deduct now and how much carries forward.

Records to Keep

Form 1098 from your lender is the anchor document. Box 1 reports the interest received during the year.¹⁶ Compare it against your own payment records; lender errors happen, and a mismatch is a common source of IRS notices.

For a purchase or refinance year, the closing disclosure itemizes prepaid interest from the closing date through the end of that month, along with any points and loan fees.¹⁷

Seller-financed mortgages don’t generate a Form 1098. Keep your own payment records, and be ready to report the seller’s name, address, and taxpayer identification number on your return.¹ Also hold onto receipts for any credit card charges tied to the rental and a day-by-day calendar if you ever use the property yourself.

1
Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040)
2
Office of the Law Revision Counsel. 26 USC 163 – Interest
3
eCFR. 26 CFR 1.163-1 – Interest Deduction in General
4
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
5
Internal Revenue Service. Tips on Rental Real Estate Income, Deductions and Recordkeeping
6
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
7
Internal Revenue Service. Topic No. 505, Interest Expense
8
Internal Revenue Service. Rental Expenses
9
Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses
10
Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
11
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
12
Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc.
13
eCFR. 26 CFR 1.163-8T – Allocation of Interest Expense Among Expenditures (Temporary)
14
Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040) – Section: Lines 12 and 13
15
Internal Revenue Service. Instructions for Form 8582
16
Internal Revenue Service. Instructions for Form 1098 (Rev. December 2026)
17
Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions (Closing Disclosure)