What this line means
Interest paid on a mortgage secured by the rental property. This is the interest portion only — not principal payments, which are not deductible. The amount comes from Form 1098, Box 1, issued by your lender. Line 12 covers interest paid to banks, savings institutions, and other financial institutions. If you pay mortgage interest to an individual (seller financing), that goes on line 13 instead.
Does this apply to you?
- You have a mortgage on a rental property and make monthly payments to a bank or lender
- You refinanced a rental property and pay interest on the new loan
- You took out a home equity loan secured by a rental property
- You have a mortgage on a multi-family building where you rent out units
Easy to overlook
Rental mortgage interest goes on Schedule E, not Schedule A Mortgage interest on investment property is a rental expense deducted on Schedule E line 12 — not an itemized deduction on Schedule A. Schedule A is only for mortgage interest on your primary residence and a second home used personally. Putting rental mortgage interest on Schedule A loses the deduction’s connection to rental income and can overstate passive losses or understate rental profit. 1 IRS Publication 527 — Residential Rental Property
Points paid on a rental property mortgage are amortized, not deducted upfront When you pay points (prepaid interest) on a mortgage for a rental property, you cannot deduct them all in the first year the way you can for a primary residence. Points on rental property loans must be amortized over the life of the loan. On a 30-year mortgage, one point on a $200,000 loan ($2,000) means a $67 annual deduction for 30 years. Many landlords deduct the full amount in year one and get flagged. 2 General filing pattern — rental mortgage interest on Schedule A instead of Schedule E
Watch out for this
Including the principal portion of your mortgage payment on this line. Your monthly mortgage payment includes both principal (which builds equity) and interest (which is deductible). Only the interest portion goes on line 12. Form 1098 from your lender shows the exact interest paid during the year. Using your total monthly payment amount instead of the Form 1098 figure overstates the deduction.
Footnotes
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IRS Publication 527, Residential Rental Property, Mortgage Interest. https://www.irs.gov/pub/irs-pdf/p527.pdf ↩
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IRS Publication 527, Residential Rental Property, Points. https://www.irs.gov/pub/irs-pdf/p527.pdf ↩