Rental Expenses

Mortgage Interest and Property Taxes

Taxpayers who live in their homes generally deduct their mortgage interest and property taxes as itemized deductions on Schedule A, Itemized Deductions. When a taxpayer rents out a home, however, the interest and property taxes become rental expenses, along with the cost of certain other operating expenses. Taxpayers who do not use the rental home as their residence should:

• Include the rent as income and
• Deduct all of the rental expenses, even if they exceed income

Mortgage interest and property taxes are deductible as rental expenses. If the residence (or a portion of the residence) was used as rental property for any part of the year, the mortgage interest and real estate taxes might have to be divided between Schedule A and Schedule E. To do this:

• Divide the total mortgage interest and property taxes by 12 months, and
• Multiply by the number of months the home was used for each purpose
• Generally, mortgage interest expense is fully deductible. However, a taxpayer with rental-related interest expenses other than mortgage interest should consult the IRS, a professional tax preparer, or a military legal assistance officer.