Is Interest Expense Tax Deductible? Mortgage, Student, Business

Is interest expense tax deductible? Sometimes. Federal law lets you deduct four kinds of interest under specific rules: home mortgage interest, student loan interest, business interest (including interest on rental property), and investment interest. Everything else the tax code labels “personal interest,” and personal interest is not deductible. That includes credit card balances, personal car loans, and home equity debt spent on anything other than the home itself.¹

Home Mortgage Interest

Interest on a loan secured by your main home or a second home is deductible if you itemize on Schedule A, and if the loan was used to buy, build, or substantially improve the home that secures it.² Refinances qualify too, but only up to the balance of the original debt being replaced.

The amount of debt that qualifies depends on when the loan originated. For mortgages taken out after December 15, 2017, interest is deductible on the first $750,000 of debt ($375,000 if married filing separately). Older mortgages keep the earlier $1,000,000 cap ($500,000 if married filing separately). If your loan is larger than the applicable limit, only a proportional share of the interest is deductible.²

Home Equity Loans and HELOCs

A home equity loan or HELOC produces deductible interest only when you use the borrowed money to buy, build, or substantially improve the home securing it. Draw on a HELOC to pay off credit cards, cover tuition, or take a trip, and the interest becomes nondeductible personal interest — even though your house is on the hook. The IRS defines a substantial improvement as one that adds value, extends useful life, or adapts the home to a new use. Routine maintenance like repainting on its own does not count, though painting bundled into a larger renovation can be included.²

Mortgage Points

Points paid to obtain a mortgage are prepaid interest and are usually deducted over the life of the loan. You can deduct the full amount in the year you pay if all of the following are true: the loan is for your principal residence, paying points is customary in your area, the points are calculated as a percentage of the loan amount, and you provided funds at or before closing at least equal to the points charged.³ Points on a refinance or a second home are generally spread over the loan term.

One item that used to belong here no longer does: private mortgage insurance premiums (PMI) are no longer treated as deductible interest.²

Student Loan Interest

You can deduct up to $2,500 per year in interest paid on a qualified education loan.⁴ This one is above-the-line, meaning you get it even if you take the standard deduction. It reduces your adjusted gross income directly.

The deduction phases out as income rises. For 2026, single filers start losing it once modified adjusted gross income exceeds $85,000 and lose it entirely at $100,000. For joint filers the phase-out runs from $175,000 to $205,000. You cannot claim it at all if you file married filing separately or if someone else claims you as a dependent.

Business and Rental Interest

Interest on debt used in a trade or business is generally deductible, including commercial loans, business credit lines, and equipment financing.¹ What matters is how you spent the borrowed money, not what secured the loan. This is the use-of-proceeds doctrine.

Larger businesses face a cap. The business interest deduction cannot exceed 30 percent of adjusted taxable income for the year, plus business interest income and certain floor plan financing interest. Small businesses that meet the gross receipts test — average annual gross receipts of $32 million or less over the prior three tax years for 2026 — are exempt from the cap.¹

Mortgage interest on rental property is deducted as a business expense on Schedule E rather than Schedule A. The $750,000 debt limit does not apply, because that cap covers only a qualified residence (your main or second home). If you rent out a second home and your personal use exceeds 14 days or 10 percent of the days it was rented (whichever is longer), the property still counts as a second home; below that, it is treated as rental property and the rental rules apply instead.²

Investment Interest

Interest on debt used to buy property held for investment, such as a margin loan to purchase stocks, is deductible only up to the amount of your net investment income for the year.¹ Net investment income generally includes interest, ordinary dividends, annuities, and royalties from investment property. It does not include qualified dividends or net capital gains unless you specifically elect to include them, and that election costs those amounts their lower tax rate.⁵

Any investment interest you cannot deduct in the current year carries forward and is treated as if you paid it the following year. The carryforward is indefinite, so disallowed interest waits until you have enough investment income to absorb it.

Interest You Cannot Deduct

Everything not covered above falls under “personal interest,” which the tax code bars from deduction.¹ The common examples:

Personal credit card interest, regardless of what you charged.
Interest on car loans for personal use. A vehicle used for business may qualify under the business interest rules.
Interest on debt used to buy or hold tax-exempt securities like municipal bonds.⁶
Home equity debt spent on anything other than improving the home securing it, as covered above.

When Itemizing Is Worth It

Not every deductible interest expense requires itemizing. Student loan interest is above-the-line. Business and rental interest sit on their own schedules. But home mortgage interest and investment interest only help if you file Schedule A, and Schedule A only pays off when your total itemized deductions beat the standard deduction for your filing status. For 2026 that standard deduction is $16,100 for single filers or those married filing separately, $32,200 for married filing jointly, and $24,150 for head of household.⁷ If your mortgage interest plus your state and local taxes, charitable gifts, and other itemizables does not clear that threshold, the mortgage interest deduction gives you nothing extra. Run the comparison each year, because income, loan balance, and law changes all move the answer.

Where Each Deduction Goes

Each type of interest lands on a different part of the return:

Home mortgage interest and investment interest go on Schedule A (Form 1040). Investment interest also requires Form 4952.⁸
Business interest for sole proprietors goes on Schedule C.
Rental property and pass-through business interest go on Schedule E.
Student loan interest goes on Schedule 1 as an adjustment to income.⁸

Your lender sends Form 1098 for mortgage interest and your servicer sends Form 1098-E for student loan interest, each when the total for the year hits $600.⁹ The IRS gets copies. Business owners generally do not receive a standard form and need to pull interest totals from their own amortization schedules or accounting records.

Penalties for Overstating Interest Deductions

Claiming interest you are not entitled to, or inflating the amount, can trigger an accuracy-related penalty of 20 percent of the underpayment caused by negligence, disregard of the rules, or a substantial understatement of income tax.¹⁰ A substantial understatement generally means the tax you reported was off by more than the greater of 10 percent of the correct tax or $5,000. Interest also runs on any unpaid balance from the original due date, so an error compounds the longer it sits.

1
Office of the Law Revision Counsel. 26 USC 163 – Interest
2
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
3
Internal Revenue Service. Topic No. 504, Home Mortgage Points
4
Office of the Law Revision Counsel. 26 USC 221 – Interest on Education Loans
5
Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses
6
Office of the Law Revision Counsel. 26 USC 265 – Expenses and Interest Relating to Tax-Exempt Income
7
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
8
Internal Revenue Service. Instructions for Schedule A (Form 1040) (2025)
9
Internal Revenue Service. Instructions for Form 1098 (12/2026)
10
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments