Can You Claim Interest on Rental Property Mortgage?

Tax deductions for rental properties you might own differ from the deductions you can take for your personal residence.

Tax deductions on rental properties can be confusing. Although many of the same items deducted on an individual homestead can be claimed for a rental property, not all of the same rules apply. Before you file your tax return for the year, it's important to know what portions of the interest can be deducted and what portions cannot.

Profit

The profit made on a rental home is typically not substantial when you look at monthly income. Most rental properties will net only a few hundred dollars of profit for the landlord per month, if they are still carrying a mortgage on the property. However, this income is rarely pure profit. Many times the proceeds of the profit that a landlord receives will be used to account for the care and maintenance of the rental home. This is part of the equation when you figure your tax deductions.

Depreciation

Rental properties will incur damages and require maintenance. The amount of money spent each year in maintaining and repairing a rental property is tax deductible on your federal return.

Interest

Mortgage interest on a rental property is generally deductible as a business expense, along with the other expenses of running a rental operation, including maintenance and depreciation. However, given the complications of the tax code, it is wise to consult the advice of a tax adviser as opposed to coming up with the deductions and figures on your own to ensure that you are coming up with the correct amount.

Ownership

You can get into trouble with the mortgage interest deduction if you try to deduct the interest paid on a refinancing loan, for example, if you have used the proceeds for purposes unrelated to the underlying rental property -- such as buying other rental properties. The IRS takes a dim view of such attempts to generate tax free investment income, so take pains to document the purposes for which you use refinanced capital if you hope to deduct the mortgage expense.

IRS Publications

The most common IRS forms used for property owners with rental homes to help them calculate their annual tax deductions are IRS Publication 527, Residential Rental Property and Publication 535, Business Expenses. For mortgage interest deductions, property owners can reference IRS Publication 936, Home Mortgage Interest Deduction. These forms provide the instructions on filling out the forms as well as how they translate to your 1040 at the end of the year.

References

• Bankate.com; Mortgage Interest Deductions; Don Taylor