It depends on if your rental losses are considered passive losses, it won't deduct from your other income, so essentially you are not utilizing your full interest deduction. passive losses can only offset passive income. But the loss is carried forward and applied to passive income in future years.
There are some exceptions. The first exception relates to your Modified Adjusted Gross Income (MAGI). If your MAGI is $100,000 or less for the tax year, you can deduct up to $25,000 of rental loss. This means you can apply your rental loss, up to $25,000, against any income, whether it is passive or not. However, you must have actively participated in the rental activity and have more than a 10% ownership interest in the property.
You may also be able to take a reduced amount of the rental loss if their MAGI is more than $100,000. The $25,000 deduction allowance is phased out from $100,000 – $150,000. This means that the full $25,000 deduction allowance can be taken until your MAGI exceeds $100,000. As your MAGI nears $150,000, the $25,000 deduction allowance will be reduced. Once your MAGI reaches $150,000, the deduction allowance is no longer able to be taken.
If you enter the full interest deduction as a personal itemized deduction and you indicate in the program that you rent out a portion of your home, the software will make the proper allocation for you depending on the percentage of rental use area. This means that you can't take the full interest on the Schedule A itemized deductions, it has to be allocated properly to the rental use area percentage.
If going back and amending previous years gives a significant amount of money back, I advise amending those years. You can go back 3 tax years to claim a refund.
