Can I claim mortgage interest deduction after turning my first home into a rental and buying a second home?

So I'm in a bit of a tax situation and trying to understand what I can actually deduct. Last September, I purchased a new home in Raleigh (about $385k) while keeping my first home that I bought back in 2019 (paid $210k). I decided to rent out the first property instead of selling because the rental market is pretty strong in my area. I read the IRS rules that we can take interest deductions on a primary residence and a second home, but I'm confused about how this works when the first home becomes a rental property. Does my first home still count as a "second home" for mortgage interest deduction purposes? Or is it now just considered a rental property with different tax implications? My mortgage interest on the new home was about $15,400 last year, and on the former primary residence (now rental), it was approximately $7,900. I want to make sure I'm filing correctly and taking all the deductions I'm entitled to. Any guidance would be appreciated!

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19 comments

Dmitry Ivanov

•8M

You've actually got a pretty common situation here, but the terminology can be confusing! When you convert a primary residence to a rental property, it no longer qualifies as a "second home" for mortgage interest deduction purposes. It becomes a rental property, which is treated differently on your tax return. For your new home in Raleigh, you can claim the mortgage interest ($15,400) as an itemized deduction on Schedule A since it's your primary residence. For your rental property, the mortgage interest ($7,900) isn't claimed on Schedule A - instead, it's reported as a business expense on Schedule E where you report your rental income and expenses. The good news is that you can deduct both, just in different places on your tax return. The interest on your rental is actually better in some ways because it reduces your rental income directly rather than just being an itemized deduction that might not help if you take the standard deduction.

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Dmitry Ivanov

•8M

That's exactly right! You don't lose the deduction - it just moves to Schedule E as a rental expense. This is actually advantageous because rental expenses on Schedule E reduce your rental income directly, regardless of whether you itemize or take the standard deduction on your personal return. For the transition year, you'll need to determine the property's fair market value at the time of conversion (usually with a comparative market analysis or appraisal). This establishes your depreciable basis. You'll only claim mortgage interest on Schedule E for the period the property was used as a rental. So if you converted in September, you'd claim mortgage interest on Schedule A for January-August, and on Schedule E for September-December.

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Miguel Silva

•8M

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Miguel Silva

•8M

Yes, it absolutely handled the property tax situation! It walked me through allocating the property taxes proportionally between Schedule A (for the months I lived there) and Schedule E (for the rental period). It was really straightforward - you just enter when the conversion happened and it does the math for you. I was skeptical too initially, but it actually did handle the mid-year conversion perfectly. It creates a clear breakdown of which expenses belong where based on the exact dates of conversion. My accountant reviewed everything and was impressed with how accurately it allocated all the expenses between personal and rental use periods. It saved me hours of research and calculations.

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Connor O'Neill

•8M

After seeing the recommendation here, I tried taxr.ai for my rental property tax situation, and I have to admit I was wrong to be skeptical. I've owned rental properties for years but recently converted another primary home to a rental, and the tool actually caught something I'd been doing incorrectly with my depreciation calculations. The document analysis feature is particularly helpful - I uploaded my closing documents from when I first bought the property, and it correctly separated the land value from the building value for depreciation purposes. It also helped me track expenses during the conversion period (repairs, improvements, etc.) and categorized them correctly as either immediately deductible or items that need to be depreciated. If you're dealing with rental property tax issues, especially conversions from primary to rental, it's definitely worth checking out. The rental property section alone saved me from making a $3,200 mistake on my return!

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QuantumQuester

•8M

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QuantumQuester

•8M

It works by using an automated system that continually calls and navigates the IRS phone tree until it gets through, then it connects you directly when a representative answers. It's not a scam - you're still talking directly to the actual IRS, the service just handles the frustrating hold time for you. I was skeptical too! But it's not a "front of the line" pass. They just have technology that continuously redials and navigates the phone tree so you don't have to sit there doing it yourself. When they finally get through after however long it takes, they connect you directly to the IRS representative who answered. You're still waiting your turn, just not having to physically sit by your phone for hours.

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Keisha Williams

•8M

Alright, I need to eat crow here. After posting my skeptical comment, I was desperate enough to try Claimyr because I had a serious issue with my rental property taxes that needed IRS clarification before filing. My accountant gave me conflicting info about how to handle depreciation recapture on a property I converted then sold within 2 years. I used the service yesterday morning - it took about 2 hours (which they warned me about due to high call volume), but I got a notification when they were about to connect me, and then I was suddenly talking to an actual IRS tax specialist. They answered my specific questions about Section 121 exclusion combined with depreciation recapture when converting a primary residence to a rental. No gimmicks, no scams, just saved me from sitting on hold for what would have likely been half my day. For anyone with complicated rental property questions that need official answers, it's legitimately helpful.

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Paolo Ricci

•8M

Don't forget about the possible depreciation recapture if you ever sell your former primary residence! This bit me hard last year. When you convert to a rental, you start taking depreciation (even if you forget to claim it, the IRS considers it "allowed or allowable"). When you sell, you'll need to recapture that depreciation at 25% tax rate, which can be a nasty surprise if you're not prepared. Plus, you'll only be able to use the Section 121 exclusion ($250k/$500k) for the portion of appreciation that happened while it was your primary residence.

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Paolo Ricci

•8M

Yes, depreciation recapture can definitely offset some of the current tax benefits you're getting. There are a few strategies to minimize the hit when you eventually sell. A 1031 exchange is one option - if you sell the rental and buy another investment property, you can defer the depreciation recapture and capital gains taxes. This kicks the tax can down the road. Alternatively, you could consider moving back into the property before selling (needs to be your primary residence for 2 out of 5 years before selling to qualify for the full Section 121 exclusion), though you'd still face recapture on the depreciation you've taken. Annual tax planning is also important - try to time the sale in a year when you might have capital losses or lower income to offset the tax impact.

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Yara Nassar

•4d

Just want to add one more consideration that hasn't been mentioned yet - make sure you're tracking your expenses properly from day one of the rental conversion. Beyond just the mortgage interest, you can deduct things like repairs, maintenance, property management fees, advertising costs for finding tenants, and even mileage for trips to the rental property. I converted my primary residence to a rental three years ago and wish someone had told me to start keeping detailed records immediately. Things like receipts for minor repairs, documentation of time spent on property management activities, and photos of the property's condition can all be valuable come tax time. The mortgage interest deduction is just one piece of a much larger tax strategy for rental properties. Also, don't forget that you'll need to report all rental income, including security deposits if you don't return them. The good news is that most expenses related to maintaining and operating the rental can offset that income on Schedule E.

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