Full deductibility on Schedule E
Interest on a mortgage used to acquire, build, or substantially improve a rental property is an ordinary business expense deductible on Schedule E of Form 1040. Unlike the mortgage interest deduction for a primary or second home — which is limited under TCJA to interest on up to $750,000 of acquisition debt — there is no dollar cap for rental property. Whether your rental has a $200,000 mortgage or a $2,000,000 mortgage, 100% of the interest is deductible.
Mortgage insurance premiums on a rental property (PMI, MIP) are deductible as an ordinary business expense on Schedule E — separate from the rules for primary residence mortgage insurance, which have their own income limitations.
Cash-out refinances: use of proceeds matters
If you refinance your rental for more than the outstanding balance and take cash out, the deductibility of interest on the excess depends on how you use the proceeds. Proceeds used for the rental property — paying for capital improvements, repairs, operating expenses, or acquiring additional investment property — produce fully deductible mortgage interest. Proceeds used for personal purposes (vacation, paying off a car, funding a personal investment) are not deductible against rental income.
If your refi proceeds are mixed between rental and personal use, you must allocate the interest between the two purposes based on how the money was spent. Keep detailed records of the proceeds deployment.
Points and construction loan interest
Points paid to obtain a rental mortgage cannot be deducted all in year one (unlike points on a primary home purchase loan). Instead, they must be amortized over the life of the loan. A $6,000 point payment on a 30-year rental mortgage produces a $200 deduction per year. Construction and major-renovation loan interest is capitalized during the construction period — added to the property's depreciable basis — and then deducted through depreciation once the property is placed in service, not as a current-year expense.
Frequently asked questions
Is there a cap on the mortgage interest deduction for rentals?
No. The $750,000 acquisition debt limit applies only to your primary and second home. Rental property mortgage interest is fully deductible regardless of loan size.
Can I deduct mortgage interest if I refinanced and used some proceeds personally?
Only the portion attributable to rental-use proceeds is deductible against rental income. Interest on proceeds used for personal purposes must be traced and excluded.
How do I deduct points on a rental mortgage?
Points on a rental mortgage are amortized (deducted ratably) over the loan term, not fully deducted in year one.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.