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Mortgage Interest Deduction
A tax deduction for interest paid on mortgage debt secured by real property.
Definition
The mortgage interest deduction allows property owners to deduct interest paid on mortgage debt from their taxable income. For investment properties, there is no cap on the amount of mortgage interest that can be deducted — unlike primary residences, which are limited to interest on $750,000 of acquisition debt. This deduction applies to all types of mortgages on rental properties, including DSCR loans, and is taken on Schedule E of your tax return. The deduction is particularly valuable in the early years of a mortgage when most of the payment goes toward interest. Combined with depreciation, the mortgage interest deduction can create paper losses that offset rental income or (for real estate professionals) other income.
How This Relates to DSCR Loans
Interest paid on DSCR loans is fully deductible as a business expense on Schedule E. This tax benefit is identical to conventional investment property loans.
Related Terms
Interest Rate
The percentage charged by a lender for borrowing money, applied to the outstanding loan balance.
Depreciation
A tax deduction that accounts for the wear and tear of a property over its useful life.
Passive Income
Income from rental properties or businesses in which the taxpayer does not materially participate.
Amortization
The process of paying off a loan through scheduled payments that cover both principal and interest over time.
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