Can I Deduct Mortgage Payments From Rental Income?

You can deduct part of a mortgage payment from rental income, but not the whole thing. The interest, any property taxes your lender pays out of escrow, and mortgage insurance premiums are all deductible against rental income on Schedule E. The principal portion, the part that pays down the loan balance, is not. That single split accounts for most of the confusion first-time landlords run into at tax time, and it is where most of the money is either found or lost.

What Parts of the Payment Are Deductible

A typical monthly payment bundles four things: interest, principal, escrowed property taxes, and often mortgage insurance. Three of those four are deductible.

Mortgage Interest

Interest is the largest deductible piece of the payment and the easiest to document. The IRS allows you to deduct in full the interest paid on a loan secured by a rental property.¹ Your lender reports the annual total in Box 1 of Form 1098.

Early in a mortgage, most of each payment is interest and only a small slice is principal. That ratio flips over the life of the loan, so your interest deduction shrinks a little every year even though the payment amount never changes. The amortization schedule from your lender, or the Form 1098 at year end, shows the exact number.

Property Taxes Paid Through Escrow

If your lender collects property taxes as part of the monthly payment and remits them to the tax authority, those taxes are deductible as a rental operating expense.² Deduct the amount actually paid out to the taxing authority during the year, not the amount you paid into escrow. Those two figures often differ because escrow accounts carry a cushion.

Property taxes on a rental do not count against the State and Local Tax cap that limits personal itemized deductions on Schedule A. That cap, currently $40,000 for most filers and adjusted annually, applies only to taxes claimed as personal deductions.³ Rental property taxes are a business expense on Schedule E and bypass the cap entirely.

Mortgage Insurance Premiums

If you put less than 20% down and your lender requires private mortgage insurance, or you have an FHA loan with monthly mortgage insurance premiums, those payments are deductible as a rental expense. The amount is reported in Box 5 of Form 1098. Beginning in 2026, federal law treats PMI on acquisition debt as deductible mortgage interest, which removes the separate expiration questions landlords had been tracking.

Why the Principal Portion Is Never Deductible

Principal repayment is not an expense. Paying down principal reduces a debt and adds to the equity you hold in the property, so no money has left your economic picture. Allowing a deduction for principal would double-count the cost of the building, because the full purchase price is already being recovered through depreciation.⁴

A quick example makes the split concrete. If your monthly payment is $1,800 and the interest portion in the current year averages $1,100, only that $1,100 (times 12) shows up as an interest deduction. The remaining $700 each month moves value from cash to equity and produces no immediate tax effect. It reduces what you owe the bank, not what you owe the IRS.

How to Find the Interest Number

You do not have to calculate any of this yourself. Form 1098, which your lender mails or posts online each January, breaks out the interest paid, the mortgage insurance premiums paid, and often the property taxes disbursed from escrow. For a mid-year purchase or refinance, you may receive more than one 1098; add them together. If escrow numbers on the 1098 look off, check the escrow analysis statement, which shows exactly what the lender paid to the county and when.

Points and Other Loan Costs

Loan origination fees, commonly called points, are prepaid interest. On a rental property loan, you cannot deduct them in the year paid the way you might on a personal residence purchase. Instead, you spread them over the full loan term. On a 30-year mortgage, that means one-thirtieth of the points is deductible each year.⁴

If you refinance with a different lender or pay off the loan early, you can deduct the entire remaining unamortized balance of the old points in that year. Refinancing with the same lender is less generous: the remaining points get folded into the new loan and continue to be amortized.⁵

Other closing costs from the original purchase, like attorney fees, appraisal fees, title insurance, and transfer taxes, are not currently deductible either. They are added to the property’s cost basis and recovered over the 27.5-year depreciation schedule.

The Deduction That Usually Dwarfs the Interest

A reader focused on mortgage deductibility often misses that depreciation is the bigger number on most rental returns. Depreciation lets you recover the cost of the physical building over 27.5 years using the straight-line method, without spending anything in the current year.⁴

Start with your cost basis, generally the purchase price plus certain settlement costs and any improvements made before renting. Subtract the value of the land, which cannot be depreciated. Divide the remaining building value by 27.5. A property with a $275,000 building value produces a $10,000 depreciation deduction every year.

Depreciation is not optional. If you skip it, the IRS still reduces your property’s basis by the amount you could have deducted, and when you sell, you owe tax on that “phantom” depreciation at a rate of up to 25%. This is called unrecaptured Section 1250 gain. Skipping depreciation loses you the annual tax savings without saving you anything at sale.⁴

Whether Your Losses Are Actually Usable This Year

Adding interest, property taxes, insurance, depreciation, and other operating costs together often produces a loss on paper even when the property is cash-flow positive. Whether you can actually use that loss against your other income depends on the passive activity rules.

Rental real estate is classified as a passive activity for most taxpayers. Passive losses generally offset only passive income, not wages, salary, or self-employment earnings.⁶

There is an exception that catches most small landlords. If you actively participate in managing the rental, meaning you make the real decisions about tenants, repairs, and rent, you can deduct up to $25,000 of rental losses against non-passive income. That $25,000 begins phasing out when modified adjusted gross income exceeds $100,000 and is gone entirely at $150,000. Married taxpayers filing separately who lived together at any point during the year cannot use this allowance at all.⁶

Losses you cannot use this year are not gone. They carry forward and can offset passive income in later years, or come off the books when you sell the property in a fully taxable sale.

Where to Put All of This on Your Return

Rental income and expenses go on Schedule E (Supplemental Income and Loss), which flows into Form 1040. Schedule E has specific lines for mortgage interest, property taxes, insurance, repairs, management fees, and depreciation. Gross rental income minus total deductions produces the taxable rental income or loss for the year.²

Keep the Form 1098, property tax statements, the closing disclosure that establishes your basis, and a running depreciation schedule for as long as you own the property, plus at least three years after you sell.⁷ If a deduction cannot be substantiated during an audit, you can lose it, along with penalties on top.

1
Office of the Law Revision Counsel. 26 USC 163 – Interest
2
Internal Revenue Service. Instructions for Schedule E (Form 1040)
3
Internal Revenue Service. Topic No. 503, Deductible Taxes
4
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
5
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
6
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
7
Internal Revenue Service. Topic No. 305, Recordkeeping