Can I deduct mortgage interest as a Business Expense after refinancing to pay off Business Loan?

I run a small consulting business and last year I was struggling with a Business Loan that had a killer 8% interest rate. The payments were eating into my profits big time. So in March, I came up with what I thought was a smart solution - I refinanced my primary home mortgage at a much better 5% rate and took $150k cash out during the process. My original mortgage was around $215k, and with the cash-out refi, my new mortgage became $365k. I deposited the $150k cash-out into a completely separate business account and immediately used those exact funds to pay off my Business Loan. No mixing with personal money or anything - it was a direct transfer. Now I'm paying this new consolidated home mortgage for the next 30 years, but a significant chunk of it ($150k) was clearly used to pay off business debt. Here's my question - can I still claim the interest on that $150k portion as a business deduction against my business income? When it was a separate Business Loan at 8%, I was deducting that interest no problem. With this new arrangement, I'd only be claiming the 5% interest portion related to that $150k until my principal gets paid down from $365k to $215k (after which I'd stop the business interest deduction). My thinking is this should be perfectly legitimate since I'm still paying interest on money that was used 100% for business purposes - I just renegotiated a better rate through my home equity. But I want to make sure this is kosher with the IRS before I file. Anyone have experience with this kind of situation?

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18 comments

Luca Bianchi

•8M

This is a great question about tracing debt. The IRS has specific rules about this exact situation under what's called "interest tracing rules." Since you clearly took the $150k and immediately used it to pay off a business loan without commingling funds, you should be able to deduct the interest on that portion as a business expense. The key is maintaining proper documentation showing the clear path of those funds. Make sure you have records showing: 1) The refinance transaction, 2) The transfer of exactly $150k to a separate account, and 3) The immediate payoff of the business loan with those exact funds. You're right that you would only deduct the interest proportional to the $150k business portion of your new mortgage ($150k/$365k = about 41% of your mortgage interest). As you pay down the principal, you'll need to recalculate this percentage annually.

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Luca Bianchi

•8M

The fact that the loan is secured by your personal residence doesn't change the deductibility. The IRS follows the "use of proceeds" doctrine, not the type of collateral used. Since you used the proceeds for business purposes, the interest on that portion remains deductible as a business expense. The security (your home) only affects what might happen if you default, but doesn't change the tax treatment of the interest. This is why keeping perfect documentation of the flow of funds is so critical - you need to be able to show the direct business use if audited.

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Nia Harris

•8M

I went through almost this exact scenario last year! My business loan was killing me at 9% and I refinanced my home to pay it off. I was super confused about the tax implications and found this amazing service called https://taxr.ai that specializes in analyzing complex tax situations like this. They reviewed my mortgage refinance documents, the bank statements showing the transfer to pay off the business loan, and confirmed that yes - I could deduct the proportional interest as a business expense. They even created a worksheet that calculates the exact deductible portion as I pay down the loan so I don't have to figure it out myself each year.

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Nia Harris

•8M

They analyze your specific tax documents and transactions to give personalized advice. You upload your documents securely (mortgage paperwork, bank statements, etc.) and they evaluate your unique situation rather than just giving generic advice. They helped me create a clear "paper trail" showing exactly how the funds were used. For situations with multiple business expenses, they're even more helpful because they organize the documentation to show all the different business uses. They created a proper allocation method that stands up to scrutiny if the IRS ever questions it.

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Aisha Ali

•8M

Just wanted to follow up about taxr.ai since I was skeptical in my earlier comment. I actually went ahead and tried it with my complicated rental property refinance situation (similar but different from OP's case). Was pleasantly surprised that they really do look at your specific documents! They identified a major mistake in how I was calculating my deductible interest and potentially saved me from an audit. Honestly didn't expect it to be that thorough - they even provided citations to specific tax code sections relevant to my situation.

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Ethan Moore

•8M

For anyone dealing with questions like this, I highly recommend getting clarity directly from the IRS. I know, I know - getting through to them seems impossible. After trying for weeks with no luck, I found this service called Claimyr at https://claimyr.com that actually got me connected to an IRS agent in under an hour. I had a similar refi situation and was getting conflicting advice from different tax pros. The IRS agent I spoke with confirmed exactly what to do and now I have documented guidance if there's ever an audit. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - it's basically a callback service that navigates the IRS phone system for you. Saved me hours of frustration.

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Ethan Moore

•8M

They use a system that continuously monitors the IRS phone lines and secures you a spot in the callback queue as soon as one becomes available. It's not that they're calling repeatedly - they're using technology to essentially hold your place in line without you having to stay on the phone. They actually call you first when they've secured your spot, then connect you directly with the IRS when it's your turn. I was absolutely blown away when I got the call connecting me to an actual IRS representative after trying unsuccessfully on my own for weeks.

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StarSurfer

•8M

I need to eat some crow here. After posting my skeptical comment above, I broke down and tried Claimyr because I was desperate to resolve a business expense question similar to OP's situation. I'm absolutely shocked to report it actually worked. Got a call back in about 45 minutes and spoke to an IRS agent who clarified everything. The agent confirmed that interest tracing rules would allow the deduction in a situation like OP's as long as there's clear documentation. Saved me from making a potential mistake on my return. Consider me converted from skeptic to believer.

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Carmen Reyes

•8M

Something important that hasn't been mentioned yet - make sure you're maintaining separate accounting for this. Even though the loan is physically combined with your home mortgage, you should track the business portion separately in your books. I recommend creating an amortization schedule that shows exactly how much interest is attributed to the business portion each year. Also remember that when you sell your home eventually, having part of your mortgage classified as business debt might create complications. You might need to recapture some depreciation if you've been deducting home office expenses too.

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Carmen Reyes

•8M

You should maintain a completely separate amortization schedule just for the business portion of the loan. Track principal and interest payments specifically for that $150k portion each year. This becomes especially important if you sell your home before that portion is paid off. When you do sell your home, you'll need to clearly identify how much of the remaining mortgage is attributable to the business. Your tax professional should then help you determine if there are any tax consequences related to that business portion during the home sale. The key is having clean, separate records from day one.

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