Your interest is deductible as an expense, but the value of your home minus the value of your land is depreciated. This is why you do not deduct the principal. By deducting the principal and taking depreciation (if you're taking depreciation), you are overstating your deductions and a) underreporting your income and/or overstating your losses.
IRS Publication 527 states:
?Interest expense. You can deduct mortgage interest you pay on your rental property.
Types of Expenses
Listed below are the most common rental expenses.
Advertising.
Auto and travel expenses.
Cleaning and maintenance.
Commissions.
Depreciation.
Insurance.
Interest (other).
Legal and other professional fees.
Local transportation expenses.
Management fees.
Mortgage interest paid to banks, etc.
Points.
Rental payments. (this refers to items you rent for business use)
Repairs.
Taxes.
Utilities.
I would recommend you speak to a CPA or Enrolled Agent who can help you to correct your prior year returns. We have a service called CPASelect where you can work with someone one-on-one.
Link: https://turbotaxcpaselect.intuit.com/
You have two issues a) prior reporting that is incorrect and b) the impact to your net profit or loss upon the sale of your property.
I hope this helps. ~Leslie
