Ostroff, Fair and Company
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How do I calculate the Mortgage Interest on a Rental Property?


I decided to rent my place out that I was living in to someone in October, 2006. When I calculate the Mortgage Interest for the rental do I just calculate the interest paid during October through December of 2006 since those are the months I rented the property out?

Mortgage interest for the first 9 mos. gets reported on Schedule A "Itemized Deductions." The interest for the last 3 mos. gets reported on Schedule E for rental activities. You would also report your rental income and any expenses you incurred, i.e. repairs, maintenance, taxes, insurance, etc. Obviously only a portion (25%) of some expenses would be deductible since you only rented out the home for 25% of the year.

Don't forget that you can also take a depreciation deduction now since you've converted the property to rental property. Your basis would be the lesser of its fair market value or its adjusted cost basis on the date of change. You depreciate the property over 27.5 yrs. using either MACRS or the straight-line method. Source(s): http://www.irs.gov/publications/p527/ar0...
All the interest is deductible, but the rental interest gets deducted on the business expense form while the rest gets deducted on Schedule A. The business expense form also gets any maintenance, utility, insurance, and property tax expense, all of which need to be suitably apportioned. The residential part of the property tax is a Schedule A deduction.
Kind of.

What you do is calculate an "owner occupied percentage". The time you rented it out was 3 months. Divide 3 months out of 12 months which equals,
25%. Show 75% as the owner occupied percentage.

Tax programs will allocate 75% of the mortgage interest and real estate taxes
to Schedule A and 25% to Schedule E.
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