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How to Deduct Mortgage Interest for a Rental Property

Schedule C---Profit or Loss from Business

1.

Enter interest expense paid to a bank or financial institution on line 16a for rental property used in your trade or business. This amount is reported in box 1 of Form 1098, Mortgage Interest Statement. (See Reference 2)

2.

Include on line 16a, any allowable interest paid that exceeds the amount reported to you on Form 1098. Refer to Publication 535 if you paid more interest than what is reported to determine whether or not it is deductible. Attach a statement explaining the difference and enter "See Attached" in the margin next to line 16a. (See Reference 2)

3.

Report on line 16b, any interest paid that is not reported to you on Form 1098 by the lender.

4.

Enter your portion of interest expense on line 16b if you are jointly liable with another person for the mortgage and that person received a Form 1098. Include the name and address of the other party on a separate statement and write "See Attached" in the margin beside line 16b. (See Reference 2)

5.

Enter the net profit or loss on line 31 of Schedule C after all income and expenses have been reported. Transfer this amount to Form 1040, line 12, or Form 1040NR, line 13. (See Reference 3)

Schedule E---Supplemental Income and Loss

1.

Enter the amount of interest paid to a bank or financial institution that was reported to you in box 1 of Form 1098.

2.

Enter any additional interest that is allowable on line 12 if you paid more mortgage interest than what is reported on Form 1098. Refer to Publication 535 to determine how much of the excess is deductible. Attach a statement explaining the difference and enter "See Attached" on the dotted line next to line 12. (See Reference 1)

3.

Enter mortgage interest paid on line 13 if the lender was not a financial institution or you did not receive Form 1098.

4.

Report your portion of interest expense for which you were jointly liable on line 13, if the other party received a Form 1098. Attach a statement including the name and address of the other person and enter "See Attached" on the dotted line next to line 13. (See Reference 1)

5.

Report the net income or loss from rental real estate on line 26 of Schedule E after all income and expenses have been entered. Transfer this amount to Form 1040, line 17, or Form 1040NR, line 18. (See Reference 4)

Tips and Warnings

  • Seek the advice of an accountant or tax professional for help in preparing your return.
  • Do not include any prepaid interest for rental property on Schedules C or E. Deduct only the portion that applies to the current tax year. Net losses on either schedule may be subject to at-risk and passive activity limitations.


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