It is insane, and yes you can "expense" mortgage interest against your taxes, and in the case of a rental, a portion of everything else too. Incentivizes owning houses.
(Again excuse any ignorance of the tax laws in the US)
In a fair world, this would only be allowed on the first buy-to-let property. Anything above that is just not in the interest of society in general, especially in cities like SF and Sydney that are running out of space to and/or NIMBY behaviour.
Rental properties are essentially just treated like businesses. You invest in a capital asset and take depreciation on it. You pay taxes on earnings, which means you can deduct business expenses from revenue.
The detailed reality is a bit more complicated of course (there are rules specific to real estate) but that's the essence.
In a fair world, this would only be allowed on the first buy-to-let property. Anything above that is just not in the interest of society in general, especially in cities like SF and Sydney that are running out of space to and/or NIMBY behaviour.