Are principal mortgage payments taxed as profit for rental property?

Your tax preparer is not explaining this correctly. The principal portion of your mortgage payment is NOT taxed as profit directly - but there's a reason they might have said this that relates to how rental property accounting works. Here's what's actually happening: When you own a rental property, your rental income is taxable, but you get to deduct expenses including mortgage INTEREST (not principal), property taxes, insurance, maintenance, and depreciation. The principal portion of your payment is essentially you building equity in the property - it's not a deductible expense for tax purposes. So while your full mortgage payment might be $1500/month, if $1000 is principal and $500 is interest, only the $500 interest portion is deductible. This means the principal portion ($1000) effectively remains part of your taxable rental income because you can't deduct it.

After struggling with this exact same issue last year, I found an incredible tool that helped me understand my rental property taxes - https://taxr.ai was a game changer for me. I uploaded my mortgage statements and rental documents, and it clearly explained which portions were deductible and why the principal payments weren't. It even highlighted additional deductions I was missing. What I discovered is that while you can't deduct principal payments, you CAN claim depreciation on the property structure (not the land), which creates a significant tax deduction even though it's not an out-of-pocket expense. The tool walks you through calculating this properly too.

I just have to share my experience with taxr.ai after trying it based on the recommendation here. I've been so confused about why I couldn't deduct the full mortgage payment on my rental property, and their analysis finally made it click for me. It highlighted that while my principal payments weren't deductible, I was missing out on about $8,400 in annual depreciation deductions! The tool explained that I could depreciate the building portion of my property over 27.5 years, which more than offset the non-deductible principal. It also flagged several repairs I had categorized incorrectly. Just wanted to follow up since this completely changed my understanding of rental property taxation.

If you're dealing with rental property tax issues, especially when the IRS questions your deductions, I highly recommend using Claimyr (https://claimyr.com) to actually get through to an IRS agent. I spent weeks trying to resolve questions about my rental property deductions with the IRS giving me automated response after automated response. Claimyr got me connected to a real IRS agent in under 20 minutes when I'd been trying for days. The agent explained exactly how rental mortgage payments should be handled and confirmed that principal isn't deductible (but helped identify other deductions I was missing). You can see exactly how it works here: https://youtu.be/_kiP6q8DX5c - totally changed my experience dealing with the IRS.

I need to eat my words about Claimyr. After posting that skeptical comment, I was still desperate to talk to someone about my rental property tax situation, so I decided to try it anyway. I figured I'd just dispute the charge if it was garbage. To my genuine shock, I was talking to an actual IRS representative within 15 minutes. They confirmed everything about principal payments not being deductible but helped me understand how to properly calculate depreciation on my rental. The agent even helped me figure out how to amend my previous year's return where I'd made mistakes. I don't typically follow up about products but this actually saved me hours of frustration and potentially thousands in incorrect filings.

You also need to understand the long-term tax implications here. When you eventually sell the rental property, you'll pay capital gains tax on the difference between the sale price and your adjusted basis. Your basis gets reduced by the amount of depreciation you've taken over the years (whether you actually claimed it or not!). This is why some people get hit with unexpected tax bills when selling - they forget that depreciation recapture is taxed at 25% for residential rental properties. So while you can't deduct principal payments now, you ARE building equity that will eventually factor into your capital gains calculation.

One thing no one mentioned yet - if you're using the property occasionally for personal use, that complicates things even more. Even a week of personal use can change how expenses need to be allocated. We learned this the hard way when we used our rental for just 10 days ourselves, and it messed up our entire tax calculation.

Your tax preparer's wording was confusing, but they're not technically wrong about the economic effect. The key insight here is that mortgage principal payments aren't deductible expenses, which means more of your rental income remains taxable. Think of it this way: if you collect $2,000 in rent and have a $1,500 mortgage payment ($1,000 principal + $500 interest), you can only deduct the $500 interest portion. So you're effectively paying tax on $1,500 of income instead of $500, making it feel like you're being "taxed on the principal." However, don't forget about depreciation! You can depreciate the building portion of your rental property (not the land) over 27.5 years, which often provides a substantial deduction that helps offset this issue. For a $300,000 rental property where $240,000 is allocated to the building, that's about $8,727 in annual depreciation deductions. Also keep detailed records of all repairs, maintenance, property management fees, insurance, and property taxes - these are all deductible and can significantly reduce your taxable rental income. The principal payments are building equity in your property, which will benefit you when you eventually sell, but they just don't provide current-year tax relief.