What this line means
Interest you paid on a mortgage for property used in your business, where the lender is a bank, savings institution, or other financial institution. This covers interest on mortgages for commercial buildings, warehouses, retail spaces, or workshops you own and use for business. If the property is partly personal and partly business, only the business-use portion of the interest goes here.
Does this apply to you?
- You own a commercial building or office space with a mortgage
- You own a building where part is used for business and you pay mortgage interest
- You have a mortgage on a workshop, warehouse, or studio you use for business
- You financed the purchase of commercial property through a bank loan
Easy to overlook
Business portion of mixed-use property mortgage interest If you use 30% of a building for business and 70% as your personal residence, 30% of the mortgage interest goes on Schedule C line 16a and 70% goes on Schedule A (itemized deductions) or is nondeductible. Many sole proprietors deduct the full mortgage interest on Schedule A and forget to allocate the business portion to Schedule C, where it also reduces self-employment tax. 1 General filing pattern — mixed-use property interest allocation
Refinancing interest on business property When you refinance a mortgage on business property, the interest on the new loan remains deductible on line 16a — but only up to the amount of the original loan balance. Interest on cash-out proceeds used for personal purposes is not a business deduction. 2 IRS Schedule C instructions — Line 16a
Watch out for this
Deducting all mortgage interest on Schedule A when part of the property is used for business. The business portion belongs on Schedule C, which reduces both income tax and self-employment tax. Putting it all on Schedule A costs you the self-employment tax savings and may overstate your itemized deductions.
Footnotes
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IRS Schedule C (Form 1040) Instructions. See also IRS Publication 17, Your Federal Income Tax. https://www.irs.gov/pub/irs-pdf/p17.pdf ↩
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IRS Schedule C (Form 1040) Instructions, Line 16a. https://www.irs.gov/instructions/i1040sc ↩