Can You Claim Rental Mortgage Interest as an Itemized Deduction?

With a duplex, you allocate expenses between the two sides.
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The Internal Revenue Service doesn't let you claim rental mortgage interest as an itemized deduction. In the IRS' mind, your rental property is completely different from your personal home. As such, it has you report your rental property interest on the Schedule E form, which is completely separate from the Schedule A form where you deduct your home mortgage interest.

The Schedule E

When you own rental property, the IRS requires you to attach Schedule E to your tax return. On the Schedule E form, you list all of your rental properties, their income and their expenses. In addition to reporting your interest expense, you can claim all of the "ordinary and necessary expenses" you incur in owning your rental property. After subtracting your interest and other expenses from your property's rental income, you calculate your final profit or loss. The only number that makes it to your tax return is that bottom-line total.

Benefits of Schedule E

When you claim expenses on Schedule E, it reduces the amount of money that you include in your adjusted gross income.Since some deduction phaseouts are tied to your AGI, reducing it can help you to retain other write-offs. In addition, you can write off mortgage interest on Schedule E even if you don't itemize your personal deductions.

Rental Property Losses

If you end up losing money on your rental property as a result of your mortgage interest or any other expense, you can use that loss to offset profits on other investment properties. The IRS will also let you use the loss to reduce your taxable income if you don't have any profits to offset. As long as your modified AGI is $100,000 or less, you can claim up to $25,000 of losses against your income. If your AGI is more than $100,000, the IRS reduces your write off by $1 for each $2 of income. If you have losses that you can't use, the IRS even lets you carry them forward to future years.

Owner-Occupied Duplexes

If your rental property is an owner-occupied duplex, the rules are a little bit different. When you live in half of the property and rent out the other half, the IRS treats the duplex as two separate properties. It requires you to allocate costs between the two halves, so you will claim half of your mortgage interest as a deduction on your Schedule A while you claim the other half as a rental property expense on Schedule E.

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