Here’s a question I get all the time from business owners: “Are business mortgage payments tax deductible?” What they mean to ask is closer to what part of a mortgage is deductible. And the bigger question is, how can I purchase a property and maximize tax savings on that property?
A business mortgage is a loan secured by commercial property.
It would be nice to get a clear-cut “yes” here, but the truth is it’s a little more complicated than that. While it is not possible to deduct the mortgage payment itself, we have lots of tools at our disposal to make commercial and rental property affordable.
- Interest on the mortgage
- Depreciation
- Property taxes
What about depreciation and property taxes? Well, we won’t be talking about depreciation and property tax much today, but here’s the quick version.
A quick run-down on depreciation.
As it relates to real estate property, depreciation is an annual deduction; it is designed to help business owners recover costs related to deterioration and obsolescence over time, and there are different “recovery periods” for the two types of property we’re talking about today: thirty-nine years for commercial properties and twenty-seven and half years for residential rental properties.¹
Property tax deductions also apply to the business use of a residential home.
I’ve talked quite a bit about home office deductions and the acceleration of property tax rates in Texas. So, if you work from home, you can certainly deduct a portion of what you pay in property taxes, but keep in mind that if you choose that path, you’re going to need to produce an itemized deduction instead of going with the standard deduction.²
Now, let’s break down what a business mortgage is and how you can use one to save money.
Know which business properties are eligible for mortgage interest deductions.
An eligible property could be anything from an office building to a warehouse to a rental property. As long as you’re using that commercial property strictly for business purposes, mortgage interest is tax deductible.
But are business mortgage payments tax-deductible? No, only the interest. The principle is not tax deductible. Here’s what’s important: both the principal and interest are expenses, so if you follow the “every penny matters” philosophy, think about cash flow before you take out a mortgage.
Business loan interest, including interest from personal loans used for business purposes, may also be deductible under certain criteria.
Business mortgage payments are tax deductible but are treated differently from personal mortgage payments.
The mortgage interest deduction allows you to write off the interest paid on the mortgage of your business property. This can be a huge value in the early years of the mortgage when interest payments are higher. The deduction only applies to the repayment of a business loan.
Your business can’t write off the repayment of a personal mortgage. However, if you’re using designated sections of your home for business activities, you can deduct some housing costs through the home office deduction.
Loans used as investments or for personal expenses don’t qualify for deductions.
If you take out a loan and let it sit in your bank account, thinking you’ll get a tax break, you’re out of luck. Business loans must be used for actual business expenses, such as buying inventory, equipment, or other necessities to keep the business running.
Large businesses have specific limits for making loan payments tax deductible.
Most small business owners don’t need to worry here. But if you had average annual gross receipts of $29 million or more over three years, you can only deduct interest payments up to 30 percent of your adjusted taxable income.⁴
What does this mean in practice? Let’s say your business has an adjusted taxable income of $10 million. Under this rule, you can only deduct up to $3 million in interest payments. The rest isn’t going to help you come tax time.
Here’s some general loan advice for business owners.
1. If you’re going to take out a business loan, do it by the book.
Make sure that any loans you take out are used directly for deductible expenses that are business-related. Use those funds only for operating expenses and purchasing fixed assets, and get with your CPA or a financial advisor to look at the payment schedule, interest rate, and fine print items.
Everyday costs related to maintenance and property protection—such as repairs, utilities, and insurance—are tax deductible.⁵
2. Separate personal and business loan payments.
Keep your business and personal expenses separate. Use business loans strictly for business expenses and ensure the business use of your home is exclusive and regular. Severing the two makes it easier to track your expenses, and it helps you avoid any issues with the IRS.⁵
When it comes to paying off personal debts, use the profits generated from your business instead. That way, your interest payments will remain tax deductible and will help you stay within IRS regulations.
3. Optimize your business’s tax strategy with a professional.
I said it at the beginning: tax deductions for business mortgage payments and interest can be pretty complex. However, there are significant benefits when you properly manage business loan payments. A revolving line of credit might be a good option, and so would an agreeable business installment schedule.
Bottom line: How you fund or borrow to cover deductible expenses can make all the difference.
Get smart with business property acquisition and tax reduction.
Schedule a discovery call, and we can start today with advisory services and strategic tax planning focused on property acquisition, tax reduction, and asset protection for retirement.
Talk soon,
Jeremy A. Johnson, CPA
References
- Publication 946, How To Depreciate Property • Section 179 Deduction • Special Depreciation Allowance • MACRS • Listed Property 2023 Returns [Internet]. IRS.gov. 2024 Feb [cited 2024 Jul 4] p. 31. Available from: https://www.irs.gov/pub/irs-prior/p946–2023.pdf
- Publication 936 (2021), Home Mortgage Interest Deduction | Internal Revenue Service [Internet]. IRS.gov. 2024 [cited 2024 Jul 17]. Available from: https://www.irs.gov/publications/p936
- Threshold for the gross receipts test increased to $29 million for 2023 | Internal Revenue Service [Internet]. IRS.gov. 2024 [cited 2024 Jul 14]. Available from: https://www.irs.gov/about-irs/threshold-for-the-gross-receipts-test-increased-to-29-million-for-2023
- Basic questions and answers about the limitation on the deduction for business interest expense | Internal Revenue Service [Internet]. IRS.gov. 2024 [cited 2024 Jul 15]. Available from: https://www.irs.gov/newsroom/basic-questions-and-answers-about-the-limitation-on-the-deduction-for-business-interest-expense
- Publication 527, Residential Rental Property [Internet]. IRS.gov. 2024 [cited 2024 Jul 16]. Available from: https://www.irs.gov/pub/irs-pdf/p527.pdf
- Publication 936 (2021), Home Mortgage Interest Deduction | Internal Revenue Service [Internet]. IRS.gov. 2024 [cited 2024 Jul 17]. Available from: https://www.irs.gov/publications/p936