costs of mortgage financing

the use of mortgage debt,in addition to equity capital,to finance an income property investment has four essential tax consequences. first, the periodic"price" the investor pays for borrowing- that is, the interest-is generally deductible in the year in which it is paid. However, the repayment of principle is not. Second, the annual deprecation deduction is not affected by the mix of debt and equity financing that is used because the entire acquisition price (minus the land) is deductible. Third, mortgage funds, used for purchases or refinancings, are not taxable as income when received.
Finally, up-front financing costs (e.g., loan origination fees, discount points, appraisal fees) for investment properties are not fully deductible in the year in which they are paid. Instead, these costs must be amortized over life of the loan. For example, if up-front financing costs on a 30-year loan total $3,000, the investor may deduct $100 a year when calculating taxable income from operations. if the loan is prepaid before the end of year 30 (perhaps because the property is sold), the remaining up-front financing costs are fully deductible in the year in which the loan obligation is extinguished. if our example loan is prepaid in year 5, then $2,600[$3000-(4.00$)] can be deducted from taxable income in year 5.