Mortgage interest on a rental vs a home: what is deductible, points, and refinancing

Where rental mortgage interest goes

Publication 527 says you can deduct mortgage interest you pay on your rental property. On Schedule E it goes on line 12 when paid to a bank, and on line 13 as other interest when paid to someone else, such as a seller who financed the sale. If you paid $600 or more of mortgage interest to one person, you should receive a Form 1098 or similar statement.

If another person was also liable for the loan and received the Form 1098, you report your share on line 13, attach a statement showing that person's name and address, and write "See attached" next to the line. Publication 527 describes this case. Interest is the only part of your payment that is an expense, and our guide to recording a mortgage payment in your books shows how to split a payment into interest, principal and escrow.

How it differs from interest on your own home

Interest on the home you live in is an itemized deduction on Schedule A. Publication 936 says you can deduct home mortgage interest on the first $750,000 of debt ($375,000 if married filing separately), with higher limits for older loans, and that interest on a home equity loan is not deductible to the extent the money was not used to buy, build or substantially improve the home. Those limits belong to the personal home.

A rental's interest is a business-type expense of the rental. You deduct it against rental income on Schedule E whether or not you itemize. The business interest limit still exists: Publication 527 notes that the business interest expense in your rental real estate activity may be limited, and sends you to Form 8990 and its instructions. Ask your preparer whether it applies to you.

If you live in part of the property, you split the interest. Publication 527 gives a duplex example: you live in one half, rent the other, and pay $10,000 of interest and $2,000 of real estate taxes. You deduct $5,000 of interest and $1,000 of taxes on Schedule E, and the other half goes on Schedule A if you itemize.

Points on a rental loan

Publication 527 says points are prepaid interest, so you generally cannot deduct the full amount in the year paid and must deduct it over the term of the loan. For most small loans the points are a small ("de minimis") amount of original issue discount, and you may choose to deduct them straight line over the loan term, among other methods.

Example a made-up owner takes a $200,000 loan for 30 years on a rental and pays $2,000 in points. The de minimis test is one-fourth of 1% of $200,000 times 30 years, which is $15,000. The $2,000 is less than $15,000, so it is de minimis. Deducted straight line over 30 years, that is about $66.67 a year, so a calendar year with a full 12 months of the loan deducts $66.67.

If the loan ends early, you may be able to deduct the remaining points in the year it ends. A loan can end because of a refinance, prepayment or foreclosure. There is an exception: if you refinance with the same lender, the remaining points generally are not deductible in that year but may be deducted over the term of the new loan.

Fees to obtain the loan that are not interest, such as mortgage commissions, abstract fees and recording fees, are capital expenses and part of your basis. See which closing costs are deducted and which add to basis.

Refinancing a rental

Publication 527 says that when you refinance a rental for more than the previous outstanding balance, the part of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Points are treated the same way. The IRS's own example: a $100,000 balance refinanced into a $120,000 loan, with the extra $20,000 used to buy a car, means the points allocated to the $20,000 are nondeductible personal interest.

Example a made-up owner refinances a $300,000 balance into a $360,000 loan and uses $40,000 of the extra $60,000 for a new roof on the rental and $20,000 for personal bills. Of the $360,000, $340,000 is tied to the rental, which is $340,000 divided by $360,000, or about 94.4%. With $18,000 of interest in the year, about $17,000 is rental interest ($18,000 times 94.4%) and about $1,000 is personal. The roof money is rental use, but the roof itself is an improvement that is depreciated. Your preparer will confirm how the allocation works for your loan.

Keep the closing statement and a record of where every cash-out dollar went. The allocation follows how the money was used, so a clean paper trail is what protects the rental share.

How DoorKeeping handles it

Each property's LLC has its own books in DoorKeeping, with mortgage interest on its own expense account that maps to Schedule E line 12, and the loan principal kept out of expenses. Bank feeds and AI bill reading help get each payment recorded, and the Schedule E report comes from the books. DoorKeeping does not allocate refinance proceeds or give tax advice, so use your tax preparer for that. It costs $2 per unit per month with no other fees.

Sources

1. IRS, Publication 527, Residential Rental Property (2025): Interest expense; Points; Duplex, read Oct 30, 2026
2. IRS, Publication 936, Home Mortgage Interest Deduction (2025), read Oct 30, 2026
3. IRS, Instructions for Schedule E (Form 1040), read Oct 30, 2026

Questions

Is mortgage interest on a rental fully deductible?

Interest on a loan for the rental is a rental expense on Schedule E. The business interest limit in Form 8990 may apply in some cases, and interest on money used for personal purposes is not a rental expense.

Can I deduct the points I paid on a rental loan?

Generally over the loan term, not all in the first year. If the loan ends, such as in a refinance with a new lender, the remaining points may be deducted that year.

Is the principal part of my payment deductible?

No. Only interest is an expense. Principal repays the loan.