How do mortgage interest deduction and home office business deduction work together for taxes?

You've got the right idea! When part of your home is used for business purposes, you need to split the mortgage interest (and other home expenses) proportionally between business and personal use. Here's how it works: If 15% of your home will be used exclusively for business, then 15% of your mortgage interest would be deductible as a business expense on Schedule C. The remaining 85% of the mortgage interest would be eligible for the mortgage interest deduction on Schedule A, subject to the $750,000 mortgage limit. Just remember that to qualify for the home office deduction, the space must be used exclusively for business purposes - not as a guest room or for other personal activities. The IRS is pretty strict about this requirement. Also keep in mind that if you use the simplified home office deduction method ($5 per square foot, up to 300 square feet), you cannot deduct mortgage interest as part of your business expenses, but you can still claim the entire mortgage interest on Schedule A (though still subject to the $750k cap).

I went through this exact situation last year! Had a nightmare trying to figure it out until I discovered https://taxr.ai - it was a lifesaver for analyzing my home office scenario. Their software walks you through all the calculations and shows exactly how to maximize both the business deduction and Schedule A deduction. The best part was that it showed me I was actually eligible to deduct more than I thought for my business portion (I have about 20% of my home as office space). It automatically calculated the proper split between Schedule C and Schedule A for mortgage interest, property taxes, and even things like utilities and internet that I didn't realize could be partially deducted for business. The system handles all the Schedule C allocation for you and then tells you exactly what remains for Schedule A. Definitely worth checking out if you're dealing with this situation.

Just wanted to follow up - I tried https://taxr.ai after my skeptical question above and it was extremely helpful! I've been struggling with this exact issue (mortgage interest split between business and personal) and it clarified everything. The system actually showed me that I'd been messing up my deductions previously. I had been double-counting some expenses between Schedule C and Schedule A, which could have gotten me into trouble in an audit. The tool correctly allocated everything and even pointed out some additional legitimate business expenses I'd been missing. What really impressed me was how it handled the mortgage interest limit for the Schedule A portion - it made sure I wasn't exceeding the $750k cap after accounting for the business portion. Definitely recommend it if you're facing this home office/mortgage interest split issue.

If you're having trouble getting clear answers from the IRS about how these deductions work together, I'd suggest trying https://claimyr.com - they got me through to an IRS agent in under 20 minutes when I had a similar question last year. There's a video showing how it works here: https://youtu.be/_kiP6q8DX5c I was on hold with the IRS for literally hours trying to figure out a complicated home office/mortgage interest situation, and finally gave up until I found Claimyr. The IRS agent I spoke with walked me through exactly how to allocate my mortgage interest between Schedule C and Schedule A, and confirmed that approach was correct. The peace of mind from getting an official answer directly from the IRS was worth it, especially since mortgage interest and home office deductions are areas they scrutinize closely in audits.

Had to come back and eat my words. I tried Claimyr after posting that skeptical comment, and I'll be damned - got through to an IRS agent in 17 minutes. The agent walked me through exactly how to handle mortgage interest allocation between my rental property and personal residence. For what it's worth, the agent confirmed what others have said here - when part of your home is used for business, you allocate that percentage of mortgage interest to Schedule C, and the rest goes on Schedule A (subject to the $750k limit). They also warned me to be very careful about the "exclusive use" requirement for home offices - apparently that's a red flag area in audits. I'm honestly shocked this service worked so well. After years of spending hours on hold and eventually giving up, this was game-changing. If you're struggling with complicated tax questions like this mortgage interest allocation issue, definitely worth it to get an official answer.

Don't forget to consider if it's even worth itemizing at all with the higher standard deduction now. With the $25,900 standard deduction for married filing jointly in 2022, unless your remaining mortgage interest (after business portion) plus other itemized deductions exceeds that amount, you might be better off just taking the standard deduction. For a $1.2M mortgage at current rates, if 15% goes to business, you might still be under the standard deduction threshold depending on your other itemized deductions. Do that math first before worrying about all the Schedule A complexities.

One thing nobody's mentioned - watch out for when you sell the house! If you've been claiming depreciation on the business portion of your home (which you should with the regular method), you'll have to recapture that depreciation when you sell. Also, the business portion won't be eligible for the capital gains exclusion ($500k for married filing jointly). That's something to consider when deciding between the regular and simplified methods. The simplified method doesn't claim depreciation, so you avoid these complications when selling.

Great question! I actually went through this exact scenario when I bought my home in 2023. Your understanding is correct - you'll split the mortgage interest proportionally between business and personal use. Since your spouse will use 15% of the home exclusively for business, that 15% of the mortgage interest becomes a business deduction on Schedule C. The remaining 85% can potentially be claimed as an itemized deduction on Schedule A, but remember it's subject to the $750k mortgage debt limit. One important consideration for California: our high property values mean you might hit that $750k cap quickly. With a $1.2M mortgage, only the interest on the first $750k of debt qualifies for the personal mortgage interest deduction. So you'd calculate 15% of total mortgage interest for the business deduction, then take 85% of the interest on just the first $750k for Schedule A (assuming you itemize). Also, don't forget about California's more restrictive mortgage interest deduction limits for state taxes - we cap it at interest on $1M of acquisition debt for state purposes, which is different from the federal $750k limit. Make sure you have solid documentation showing the exclusive business use of that 15% of your home. The IRS scrutinizes home office deductions closely, especially on higher-value properties.