Is mortgage interest included in “Total Cost” of purchase, when figuring basis for depreciation on Schedule E?
No, the mortgage interest is NOT included in the basis for the home. Your basis is what you paid for the home, plus the cost of any improvements made. You can only depreciate the building, not the land, so you must apportion the basis between the land and building. Any reasonable apportionment will be accepted by the IRS. I used to use the apportionment form my property tax bills and never had it questioned although the land value often looked a bit low, IMHO. Since you are filing Schedule E you must now apportion the mortgage interest and property taxes between Schedules A and E. And don’t forget that when you sell, any depreciation allowed or allowable is recaptured and is taxed at a higher than normal capital gains rate of up to 25%. This applies even if you can exclude the gain on sale of a personal residence from tax!
