Is there a limit on mortgage interest deduction for rental property

The IRS does not impose an AGI limit on mortgage interest unless you occupy the rental.

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How you claim the mortgage interest paid on a rental home depends on the nature of the home. The Internal Revenue Service might require you to claim the mortgage interest as an expense on your business income taxes or as an itemized deduction on your personal taxes. If the home qualifies as a second home, your adjusted gross income determines the amount or mortgage interest premiums you can claim on your personal taxes.

Business or Personal Deduction

If the home is rented at fair market value or available for rent the entire year, the rental income you receive is considered a type of small-business income. You must report your rental income and expenses on Schedule E and Form 1040. If you occupy the home at some point during the year, the IRS might allow you to claim the mortgage interest premiums as a personal deduction.

Second Home

Whether you can deduct the mortgage interest for a rental home on your personal taxes depends on the amount of time you lived in the home. Because you rent out the home, to meet the IRS qualifications as a second home, you must use the home for more than 14 days or more than 10 percent of the days that you rent out the home, whichever is larger. For example, if you rent out the home for 260 days, you must occupy the home for at least 27 days for the interest to qualify as a personal deduction. If you rent out the home for 100 days, you must occupy the home for at least 14 days.

Limit for a Business Deduction

The IRS does not implement an adjusted gross income limit on deducting mortgage interest for a rental property. The amount you can deduct is equal to the amount of interest you paid. Using the 1098 you received from the financial institution, enter the total amount of mortgage paid on the rental in the line labeled "Mortgage interest paid to banks, etc." on Schedule E. If you did not receive a 1098, use your receipts to determine the amount you paid and enter this amount in the line labeled "Other Interest" on Schedule E.

Limit for Personal Deduction

The adjusted gross income limit for claiming a deduction for mortgage interest depends on your marital status. As of 2013, if you're married filing jointly with your spouse and your adjusted gross income exceeds $109,000, you can't claim a deduction for mortgage interest on your personal taxes. If you're single or filing separately from your spouse, your adjusted gross income cannot exceed $54,500. If you're married filing jointly and your income is less than $100,000, you can claim all the mortgage interest you paid on Schedule A, but if your income exceeds $100,000, your maximum deduction begins to phase out until you reach $109,000. The phase-out for single or married couples filing separately begins at $50,000.

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Writer Bio

Angela M. Wheeland specializes in topics related to taxation, technology, gaming and criminal law. She has contributed to several websites and serves as the lead content editor for a construction-related website. Wheeland holds an Associate of Arts in accounting and criminal justice. She has owned and operated her own income tax-preparation business since 2006.

Last year, I was listening to an interview of six different economists on NPR. The topic was which tax and spending policies were good or bad for America. Two things shocked me: 1) that six economists could agree on anything, and 2) the one thing they agreed on was that the home mortgage interest deduction was a bad policy. They argued that it disproportionately favors the wealthy, encourages excess debt, and drives up the cost of housing. Luckily for us mortgage holders, the only thing Congress thinks is worse than bad policy is not getting re-elected. Therefore, it is highly unlikely that the mortgage interest deduction will ever be repealed, although the amount of mortgage debt that qualifies for the deduction was reduced for home purchases after 12/15/2017.

Today’s article will answer the most common questions about many people’s largest tax benefit, the mortgage interest deduction. One nice thing about the mortgage interest deduction is it is easy to document and unlikely to trigger an IRS audit.

1) Is there a limit to how much mortgage interest I can deduct?

Yes. The first thing to understand is you will only benefit from deducting your mortgage interest if you are itemizing your deductions instead of taking the newly expanded standard deduction. Only 10-15% of taxpayers are expected to itemize based on the new tax laws in 2018 and beyond. That being said…you can still deduct the interest on the first $750k in acquisition debt. This is the total mortgage limit, whether applied to the debt on a single home or two homes. Folks who bought their homes or initiated their mortgages prior to 12/15/2017 are grandfathered under the previous limit and, therefore, can still deduct interest on up to $1 million in mortgage debt.

When you refinance a grandfathered mortgage, the interest is only deductible to the extent that the principal does not exceed the principal balance left on the original loan, unless additional mortgage debt (from a refinance) is used to substantially improve the property.

All these deductibility thresholds are the same whether you are married or single, but they are cut in half if you are married individuals filing separate returns.

2) Does the mortgage interest deduction apply to a vacation home?

Yes! You can deduct the interest on your primary residence and one additional home provided the total acquisition indebtedness does not exceed the thresholds ($750k for properties purchased after 12/15/2017). You would only be able to deduct a portion of your mortgage debt if you exceeded the deductible threshold. For example: If you bought a home (or primary and second home) in 2018 or later and had total acquisition indebtedness of $1.25 million, you could only deduct 60% of the mortgage interest ($750,000 / $1.250,000 = 60%).

3) Can I deduct the mortgage interest if I refinance and increase my loan balance?

Only interest on the remaining acquisition indebtedness balance is deductible unless the increase in loan balance is used to substantially improve the property. Acquisition indebtedness is a loan used to acquire, build, or improve your home.

For example: Suppose you have a remaining $400k balance left on your mortgage. You refinance and borrow a total of $500,000. The interest on the original $400k is deductible. However, the interest on the additional $100k would not be deductible unless the additional funds were themselves used to substantially improve the residence.

4) Can I deduct the mortgage interest on a Home Equity Line of Credit (HELOC)?

Possibly. In general, interest expense from a Home Equity Line of Credit (HELOC) is not deductible (after 2017), unless the loan was used to buy, build, or substantially improve the home that secures the loan (primary residence or second home). In addition, total mortgage interest expense is only deductible on the first $750k in total mortgage debt. HELOC debt used to pay personal expenses (e.g., credit cards, cars, vacations) is no longer deductible.

5) Does interest on rental properties qualify for the mortgage interest deduction?

Yes! Although, this works a bit differently than the home mortgage interest deduction, which is an itemized deduction subject to its own limitations. The interest deduction on a rental property is not limited to $750,000 in mortgage debt, but rather is an expense deductible against rental income. Losses on rental properties (when expenses exceed rental revenue) are only deductible up to a limit (see passive activity rules) and disallowed losses may be carried forward.

6) Does interest paid on an RV or a houseboat loan qualify for the mortgage interest deduction?

Yes! A home is anything that has sleeping accommodations, a toilet, and cooking facilities. This would include mobile homes and even some types of boats. If that isn’t reason enough to buy a houseboat, I don’t know what is.

7) Do I still qualify for the mortgage interest deduction if I rent my home occasionally?

Yes! The mortgage interest is deductible and you don’t even have to claim the rental income if your home is rented for fewer than 15 days a year! One of my clients rents his home out for movie shoots and is always careful to rent it for 15 days or fewer per year. A home rented for fewer than 15 days is classified as a personal use asset (as opposed to a rental property). The qualified mortgage interest and property taxes will be reported as an itemized deduction on Schedule A of your tax return.

On the other hand, if your home is rented for more than 15 days, you must report all your rental income and can deduct your rental expenses. However, you must divide your expenses between the rental use and the personal use. I will leave it up to your CPA or the IRS to “enlighten” you with those details.

Have a great week and email me with questions: