How do you record a mortgage payment in rental property books?
Split each payment three ways: interest is an expense, principal reduces the loan balance (a liability), and escrow goes into an escrow asset account until the lender pays the tax or insurance bill. Only the interest, and later the taxes and insurance actually paid from escrow, reach your profit and loss.
Why one bank line becomes three entries
Your bank statement shows one withdrawal to the lender. Your books need to show what that money did. Recording the whole payment as an expense overstates expenses and leaves the loan balance wrong forever. Recording it all against the loan understates expenses and misses a large deduction. Publication 527 says you can deduct the mortgage interest you pay on your rental property. Principal is repayment of borrowed money, not an expense, and escrow is your money held by the lender.
| Part of the payment | Account type | Effect |
|---|---|---|
| Interest | Expense: mortgage interest | Reduces profit; goes on Schedule E |
| Principal | Liability: mortgage loan payable | Reduces the loan balance |
| Escrow deposit | Asset: escrow held by lender | Builds a balance for taxes and insurance |
The monthly journal entry, worked
Example a made-up 10 unit building pays its lender $5,120 on March 1. The lender's statement splits it into $2,940 interest, $1,180 principal and $1,000 escrow. The entry: debit Mortgage interest $2,940, debit Mortgage loan payable $1,180, debit Escrow held by lender $1,000, credit Operating bank account $5,120. Debits total $5,120, matching the credit.
Take the split from the lender's monthly statement or online loan history, not from an amortization schedule you built at closing. Late fees, rate changes and escrow adjustments make home-made schedules drift.
When the lender pays taxes and insurance from escrow
The expense happens when the lender pays the bill, not when you fund the escrow. The IRS says this plainly for homeowners in Publication 530: you can deduct only the real estate taxes the lender actually paid from escrow to the taxing authority, and you may not be able to deduct the total you pay into the account. Ask your tax preparer to confirm the same timing for your rental.
Example a made-up building's lender pays the $7,400 property tax bill from escrow on November 20. The entry: debit Property taxes $7,400, credit Escrow held by lender $7,400. When the lender pays the $4,300 insurance premium on June 5: debit Insurance $4,300, credit Escrow held by lender $4,300.
If the lender sends an escrow refund after its annual analysis, record it as cash in and a reduction of the escrow asset, not as income. If it raises your monthly escrow, nothing changes in the method, only the split.
The year-end check against Form 1098
Publication 527 says you should receive a Form 1098 if you paid $600 or more of mortgage interest on your rental property to any one person. When it arrives, compare three numbers:
- Interest on the 1098 against your Mortgage interest account for the year.
- The loan balance on the lender's December statement against your Mortgage loan payable account.
- Property taxes paid from escrow, often shown on the 1098 or the escrow statement, against your Property taxes account.
A small gap usually means one month's split was entered from a guess. Fix the month, not the year-end total. The Schedule E instructions put interest paid to banks or other financial institutions on line 12 and interest paid to anyone else, such as a seller who financed the sale, on line 13.
Loan costs and points
Not everything paid to get the loan is interest. Publication 527 says certain costs of obtaining a mortgage on a rental, such as commissions, abstract fees and recording fees, are capital expenses added to the property's basis rather than deducted as interest. Points are prepaid interest, so they are generally deducted over the life of the loan, not all in the year paid. Give these their own accounts on the closing statement so your tax preparer can see them.
- Refinance: Publication 527 says interest on extra loan proceeds not used for the rental generally is not a rental expense, so track what any cash-out was used for.
- Interest-only periods: the whole payment except escrow is interest, so the principal line is zero.
- Late fees charged by the lender: record them separately from interest and ask your preparer how they are treated.
How DoorKeeping handles it
Each property's LLC keeps its own ledger in DoorKeeping, with expense accounts mapped to Schedule E lines, so mortgage interest, property taxes and insurance land on the right lines. You can ask your AI app to show a property's profit and loss, and any change to the books that involves money waits for your one-tap approval. At year end DoorKeeping produces Schedule E from the same books. DoorKeeping does not give tax advice.
Sources
- IRS, Publication 527, Residential Rental Property, read Oct 29, 2026
- IRS, Publication 530, Tax Information for Homeowners, read Oct 29, 2026
- IRS, Instructions for Schedule E (Form 1040), 2025, read Oct 29, 2026
Questions
- Is the principal part of a rental mortgage payment deductible?
- No. Principal repays the loan, so it reduces the loan balance on your books. Interest is the deductible part; you recover the building's cost through depreciation instead.
- Do I deduct escrow payments when I make them?
- No. Record escrow as an asset, and record the tax or insurance expense when the lender pays the bill from escrow.
- Where does rental mortgage interest go on Schedule E?
- Line 12 for interest paid to banks or other financial institutions, and line 13 for interest paid to others, such as a seller who financed the sale.