Person Calculating Principal Payments
June 29, 2022

Are Principal Payments Tax Deductible? Or Just the Interest?

Personal Taxes

If you have a mortgage on a property — whether your primary residence, a vacation home, or a rental property — you dutifully make your payments every month.

Your mortgage payment consists of three amounts:

  • Principal payments
  • Interest payments
  • Amounts deposited into escrow to cover expenses such as insurance and property taxes

You’re probably aware that you can deduct things like mortgage interest, insurance, and property taxes, but what about principal payments?

Are Principal Payments Tax Deductible?

No, principal payments are not tax deductible.  Think about it — you didn’t have to include the receipt of your mortgage loan in income when you took it out, so you don’t get to deduct the payments when you pay it back.

This goes the same for the down payment on the purchase of your property — you can’t deduct your down payment either.

Also, in the case of a property on which you take a depreciation deduction, being able to deduct your down payment and principal payments would result in a double deduction for the purchase price of the property that is attributable to the building portion of the property.

If you purchase a property for $1,000,000, of which $600,000 is attributable to building and $400,000 to land, you will eventually be able to deduct the $600,000 portion of the property attributable to building through depreciation.

But since the combination of your down payment and principal payments is $1,000,000, if you were allowed to deduct these amounts, you would be getting a deduction for this $600,000 building portion twice.

How Much of My Mortgage Payment Is Tax Deductible?

The amount of your mortgage payment that you can deduct depends on if the mortgage is on a personal residence or a rental property.

Deductible Mortgage Payment on a Personal Residence

If your mortgage is on a personal residence, you can generally only deduct the mortgage interest and property taxes as itemized deductions on Schedule A.

And even these deductions are subject to limitations that may inhibit your ability to deduct them in full or at all.

For example, the mortgage interest deduction is limited to the interest paid on $750,000 or $1,000,000 of your mortgage, depending on when you took it out.

Related: Learn more about the mortgage interest deduction limitations in this article.

Property taxes are subject to the $10,000 limitation on state and local taxes (SALT).

So if, say, you have already paid in at least $10,000 in state income taxes — whether through withholding or estimated tax payments — during the year, none of your property taxes paid will make a difference to your tax situation.

Related: Learn more about the SALT deduction and its $10,000 limitation in this article.

Deductible Mortgage Payment on a Rental Property

Generally, your entire mortgage payment except property taxes is deductible on a rental property.

And there is no limitation on the mortgage interest deduction or the property tax deduction on a rental property — it is all deductible.

Of course, if you have a tax loss in your rental property portfolio, and you are not a real estate professional, the amount of this loss you are permitted to take against your active income such as W-2 wages and business income may be limited.

Any losses you can’t deduct this year, however, are carried forward indefinitely until they can be applied against other passive income such as rental income.

Note that tax deductions vacation homes have special rules depending on how many days the home was used for personal use and how many days the home was rented out.

Cancellation of Debt Income

One way in which your principal balance could affect your tax situation is if your loan is forgiven or restructured resulting in all or a portion of your remaining principal balance being forgiven.

In this case, you could have to pay income taxes on the forgiven amount as cancellation of debt income.

Your mortgage company may issue you a Form 1099-C indicating your cancelled debt.

There are, of course, exceptions to the general cancellation of debt income rules.

For example, if you can show that you are insolvent, your cancelled debt will not be taxable to the extent that you are insolvent.


Logan Allec, CPA

Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.

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