Overview
Amortization affects rental property taxes in three overlapping ways:
- Loan amortization (mortgage schedule): determines the portion of each payment that is deductible interest versus non-deductible principal.
- Tax amortization: spreads certain capitalized, intangible costs (for example, loan acquisition fees, mortgage points, and some tenant-related lease costs) over multiple years for tax purposes.
- Depreciation (a form of cost recovery): allows you to deduct the building’s cost (not the land) over a statutory period—27.5 years for residential rental property under MACRS.
Together, these elements decide how much of your carrying costs reduce taxable rental income each year and how your tax picture changes over time.
Author’s note: In my work advising landlords over the last decade and a half, the biggest planning wins come from clearly separating loan interest, principal, amortizable costs, and depreciation at the time of purchase and when making improvements. That clarity prevents missed deductions and reduces the chance of IRS adjustments.
Loan amortization vs. tax amortization vs. depreciation — what’s the difference?
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Loan amortization (financial): A loan amortization schedule shows how each mortgage payment is split between interest (tax-deductible as a rental expense) and principal (not deductible). Early payments are interest-heavy; later payments shift toward principal.
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Tax amortization (capitalized intangible costs): Some costs you pay to acquire or finance a rental are not immediately deductible. Instead, they must be amortized—or deducted—over a specified period. Examples include certain loan origination fees, points paid to obtain a mortgage, and some lease acquisition costs. The rules vary by item and IRS guidance.
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Depreciation (tangible property recovery): The building portion of a residential rental is depreciated over 27.5 years using straight-line MACRS, which is a non-cash deduction that reduces taxable rental income annually (see IRS Publication 946 and Publication 527 for details).
The practical takeaway: the cash you spend on a mortgage payment is not the same as the tax deduction you get. Interest and allowable amortization/deductions reduce taxable income; principal repayment does not.
Sources: IRS Publication 946: How To Depreciate Property and IRS Publication 527: Residential Rental Property. For basis rules, see IRS Topic 703. (irs.gov)
How to calculate the tax impact — step-by-step
- Establish basis and allocate purchase price
- Purchase price must be allocated between land (non-depreciable) and building (depreciable). Only the building (and qualified improvements) are depreciable. Use the closing statement and an appraisal to allocate value. (IRS Pub 946)
- Determine allowable depreciation
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For residential rental property placed in service after 1986, the general MACRS life is 27.5 years (straight-line). Annual depreciation = depreciable basis ÷ 27.5.
Example: Purchase price = $300,000. Estimated land value = $60,000. Depreciable basis = $240,000. Annual depreciation = $240,000 ÷ 27.5 = $8,727. (If you make capital improvements, add their cost to basis and depreciate accordingly.)
- Determine deductible mortgage interest
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From the loan amortization schedule, sum interest paid during the tax year. That interest is generally deductible as a rental expense against rental income. Principal repayments are not deductible.
Example (simplified): 30-year, $240,000 mortgage at 4%—first-year interest might be roughly $9,500. That full amount reduces taxable rental income as an expense.
- Identify amortizable acquisition/financing costs
- Some loan-related costs must be amortized (e.g., lender’s points or origination fees). If points are paid to acquire a rental property mortgage, they generally must be amortized over the life of the loan rather than deducted in the year paid. Check IRS guidance and Form 4562. (See IRS Form 4562 instructions.)
- Combine to compute taxable rental income
- Taxable rental income = Gross rent received − deductible expenses (including mortgage interest, repairs, taxes, insurance, management fees, amortization of capitalized costs) − depreciation.
Short numerical example (combined effect)
Assume:
- Purchase price: $300,000 (land $60,000; building $240,000)
- Mortgage: $240,000 at 4% for 30 years
- Annual rent: $30,000
- Annual other expenses (taxes, insurance, repairs): $6,000
- Amortizable loan fees/points: $3,000 amortized over 30 years = $100/year
Year 1 calculations (approx.):
- Rental income: $30,000
- Mortgage interest (year 1): $9,500 (deductible)
- Depreciation: $8,727 (deductible)
- Loan-fee amortization: $100 (deductible)
- Other expenses: $6,000 (deductible)
Taxable rental income = 30,000 − (9,500 + 8,727 + 100 + 6,000) = 30,000 − 24,327 = 5,673
If you had instead assumed the entire mortgage payment (including principal) was deductible, you would have overstated deductions and risked IRS adjustment. Only interest, amortization of eligible fees, and depreciation reduce taxable income.
Selling the property — depreciation recapture and basis impact
When you sell, the adjusted basis equals acquisition basis plus capital improvements minus accumulated depreciation. Any gain up to the amount of depreciation claimed is subject to depreciation recapture rules. For real property, unrecaptured Section 1250 gain (the portion attributable to depreciation) is taxed at a maximum federal rate of 25%. See our in-depth guide to [Depreciation Recapture](
