Mortgage Interest Across the Border: Not Deductible in Canada, Deductible in the US, and the Rental Exception That Works in Both

Canada and the United States disagree on mortgage interest. Canada allows interest as a deduction only when the borrowed money is used to earn income from a business or property; interest on the mortgage for your own home is not deductible. The US allows an itemized deduction for interest on up to $750,000 of acquisition debt on a main home and a second home, wherever in the world they are. A US citizen in Canada can deduct the interest on a Toronto home on the US return; a Canadian in the US can deduct the interest on a Florida home on the 1040 but got nothing in Canada. A rental property is the case where both countries agree: the interest is an expense against the rent.

Full guide: Cross-Border Mortgages: Who Will Lend, What the Interest Deducts Against, and the Structures That Waste or Save the Write-Off

Key takeaways

• Canada, principal residence: mortgage interest is not deductible. The gain on sale is sheltered by the principal residence exemption instead. Interest becomes deductible only if the loan is used to earn income (the Smith manoeuvre converts non-deductible mortgage debt to deductible investment debt over time).
• US, main and second home: interest on up to $750,000 of acquisition indebtedness ($375,000 married filing separately) is an itemized deduction on Schedule A; the limit was made permanent in 2025. Home equity interest is deductible only if the proceeds were used to buy, build, or improve the home. The home can be in any country.
• Rental property: interest on debt used to acquire or improve a rental is deductible against rental income in both countries: on Form T776 or the Section 216 return in Canada, and on Schedule E or the 871(d) election in the US.
• US citizen in Canada: can deduct Canadian mortgage interest on Schedule A if itemizing (converted at the average rate); the deduction reduces US tax the foreign tax credit would likely have eliminated anyway, so the benefit is small unless the taxpayer has US-source income.
• Currency: an American who repays a Canadian-dollar mortgage after the Canadian dollar has weakened has a section 988 gain; a Canadian who repays a US-dollar mortgage after the US dollar has weakened has a Canadian capital gain on the debt.

Canada

Interest is deductible under paragraph 20(1)(c) only where the borrowed money is used to earn income from a business or property. A mortgage on a home you live in fails the test. A mortgage on a rental property passes it. A home equity line used to buy investments passes it (interest tracing follows the use of funds, not the security). The Smith manoeuvre uses this: each mortgage payment's principal portion is re-borrowed against the home and invested, converting non-deductible debt into deductible debt over the amortization.

Canada compensates with the principal residence exemption, which eliminates the capital gain on the home entirely, with no dollar cap.

United States

Home mortgage interest is an itemized deduction on Schedule A for interest on acquisition debt (debt used to buy, build, or substantially improve the home, secured by it) up to $750,000 for loans after December 15, 2017, on a main home and one second home combined. The 2025 tax law made the $750,000 limit permanent. Home equity debt interest is deductible only where the proceeds went into the home. Mortgage insurance premiums are deductible again from 2026 under the same law, subject to income limits.

The deduction is available only to taxpayers who itemize, and the standard deduction (about $15,750 single, $31,500 joint for 2025) absorbs it for many. High-mortgage, high-tax-state taxpayers itemize; others do not.

The US compensates on the sale side with the section 121 exclusion of $250,000 or $500,000 of gain, and taxes the excess.

The cross-border cases

US citizen living in Canada with a Canadian mortgage. The interest is deductible on Schedule A if the taxpayer itemizes (Canadian income tax, deducted on Schedule A if not claimed as a credit, or the mortgage interest itself, often pushes them over the standard deduction). The mortgage must be secured by the home (a Canadian mortgage is). The deduction reduces US taxable income, but for most Americans in Canada the foreign tax credit already eliminates US tax on Canadian-source income, so the deduction's value is limited to reducing US tax on US-source income or the stacking effect. The interest is not deductible in Canada.

Canadian living in the US with a US mortgage. The interest is deductible on Schedule A if itemizing; in no-income-tax states (Florida, Texas) the mortgage interest and property tax are often the only itemized deductions and may not exceed the standard deduction. No Canadian deduction (and no Canadian return after the departure year).

Canadian living in the US with a mortgage on the kept Canadian home, rented out. The interest is deductible against the rental income on the Section 216 return in Canada and on Schedule E in the US. Both countries agree.

Canadian resident with a mortgage on a US vacation home. No Canadian deduction (personal use); no US deduction (a non-resident does not itemize personal deductions on a 1040-NR). If the home is rented part of the year, the interest is allocated between rental (deductible on both sides) and personal (deductible on neither).

American living in Canada with a mortgage on a US home they kept and rent. The interest is deductible on Schedule E in the US and on Form T776 in Canada (with a foreign tax credit for the US tax on the net rent).

The currency trap on payoff

Section 988 treats the repayment of a foreign-currency mortgage by a US person as a currency transaction: if the US-dollar value of the debt when borrowed exceeds the US-dollar cost of repaying it (because the foreign currency weakened), the difference is ordinary income. An American who took a $600,000 CAD mortgage at 1.25 ($480,000 USD) and repays it at 1.40 ($429,000 USD) has a $51,000 gain on the payoff, even if the house was sold at a loss. Canada's parallel rule taxes a Canadian resident's gain on repaying a US-dollar mortgage as a capital gain above the $200 exemption.

Worked example

A US citizen in Vancouver has a $900,000 CAD mortgage at 5% on her home ($45,000 CAD of interest, about $33,000 USD), $180,000 CAD of employment income, and $20,000 USD of US dividends.

• Canada. No deduction for the mortgage interest; the home's gain is sheltered by the principal residence exemption.
• US. Itemizes (Canadian income tax and mortgage interest exceed the standard deduction); mortgage interest deductible on the portion of the debt up to $750,000 USD (about $1.02 million CAD, so the full mortgage qualifies): $33,000 USD deduction. The foreign tax credit eliminates US tax on the Canadian salary; the deduction's practical effect is on the US tax on the $20,000 of US dividends (which Canada does not credit fully) and the stacking.
• On payoff. If she repays the mortgage when the Canadian dollar has fallen from 1.30 to 1.40, a section 988 gain of about $50,000 USD arises on the debt.

Official sources

"For debt secured after December 15, 2017, the limit is $750,000 ($375,000 if married filing separately)." — Internal Revenue Service, Publication 936, Home Mortgage Interest Deduction, https://www.irs.gov/publications/p936

You can claim carrying charges and interest, including "most interest you paid on money you borrowed and used to try to earn investment income, such as interest and dividends." Interest on money borrowed for personal purposes, such as a home you live in, is not deductible. — Canada Revenue Agency, Line 22100 – Carrying charges, interest expenses, and other expenses, https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-22100-carrying-charges-interest-expenses.html

Practitioner note

Mortgage interest is the deduction Americans in Canada expect and Canadians in the US forget. The Schedule A deduction on a Canadian home is real but usually worth little after the foreign tax credit; the section 988 gain on paying off that Canadian mortgage is real and usually worth a lot to the IRS. The rental case is the one where both countries agree, and it is the one we structure around when a client keeps a home.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the Schedule A deduction for a foreign home, the rental interest deductions on both sides, and the section 988 analysis on a foreign-currency mortgage payoff. See cross-border pricing or book a call.