Treating home loans as unsecured and business expenses

[atjoseph88]

We have a bit of a unique situation that I was hoping to get some guidance about -- due to living in a very HCOL area, my employer offers zero-interest 30-year loans to help with home buying affordability. We are very lucky to have about $650000 in loans from my employer (30-year term) with zero interim principal payments and zero interest payments. Given that the IRS doesn't like zero-interest loans, the tax treatment for this involves an imputed interest that is reported to have been paid to me (as extra W2 wages) and then paid back to my employer by us as 1098-reported interest. We also have a traditional mortgage on top of these loans.

9until

Given that this imputed interest rate has historically been very low (until this year), when these debts are included in calculation of deductible mortgage interest per IRS Publication 936, they greatly decrease the amount of interest we can deduct (since it brings down our average interest rate significantly). For this reason, we elected 2 years ago to treat this debt as unsecured (as indicated in Publication 936) so that we can exclude it from the calculation of deductible interest.

My spouse is self-employed, has Schedule C income, and we take a home office deduction for his home office. My question lies in whether we can still deduct the business use percentage of these loans from my employer (now treated as unsecured) as a business expense either on Schedule C, line 16 (Interest) or Form 8829, line 16 (excess mortgage interest)? If it's on Schedule C, would I still multiply the amount of interest by the business use percentage of the home calculated on Form 8829 (7.34% for us)? Thanks in advance for the help!

[MonikaK1]

By treating your mortgage interest as unsecured debt, as explained in Publication 936, you have elected a tax treatment of that item. This treatment begins with the tax year for which you make the choice and continues for all later tax years. You can revoke your choice only with the consent of the IRS. For that reason, it would not be advisable to treat it as secured mortgage interest for the purpose of increasing your home office deduction, unless you request the consent of the IRS to change the tax treatment for both purposes.

Generally, you cannot deduct items related to your home, such as mortgage interest, real estate taxes, utilities, maintenance, rent, depreciation, or property insurance, as business expenses. However, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements (IRS Publication 587).