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The Mortgage Interest Deduction for a Rental Property

Letting the IRS Help You in Your Real Estate Investing Business


Approved mortgage application
Peter Dazeley/ Photographers Choice/ Getty Images
If you came to this article in a search, it is part of our Rental Property Investment Analysis. Start there to walk through a detailed analysis of a sample property.

In our Rental Property Income Series, we're looking at the ways in which a rental fourplex can return cash and tax advantages to the owner. These include:

  • Rental income after direct expenses, insurance & property taxes.
  • Depreciation deduction to offset taxes on the rental income.
  • The mortgage interest deduction.
  • We will talk about the mortgage interest deduction in this article. Using our example property purchased for $325,000 with a $260,000 loan, our mortgage interest is approximately $16,814 the first year of the loan. Looking back at our rental cash flow and depreciation calculation, we're sitting on a potential tax liability on $25,999.

    $25,999 - $16,814 = $9185

    This is far from a bad thing, as we've seen that we are pocketing $15,192 in cash, realizing property appreciation and only paying taxes on $9185. Remember that other articles in this series are discussing depreciation and other income items and deductions. In the case of this mortgage interest deduction, the IRS is helping you to keep this property while it appreciates in value, as well as enjoying a positive cash flow with less tax liability at this time.

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