HELOC for rental downpayment

5 Replies

Hi All,

Debating a HELOC on my primary residence to obtain funds for a downpayment for another rental property. Does anyone know if the heloc interest would be deductible under the new tax reform given this situation? Thanks!

@Jen Wells

I am a subscriber to Clay Morris on Youtube. He is a pretty savvy investor that does turn key properties in the Midwest and South. He did a video called "Is a HELOC Still Tax Deductible?". It was a very informative video and the gist of video will answer your question, which is NO.

HELOCs are still tax deductible under the new tax law but only for capital improvements on your personal residence. Meaning if you take out a HELOC to fix up your own house, doing roof repairs, new HVAC, sidings etc. Yes the interest on that HELOC is deductible.

However, if you are trying to take out a HELOC against your own house to buy another house. NOT HAPPENING.

I am guessing the only way you can remotely come close to doing that is if you take out a HELOC to do a househack on multifamily house that you also plan on living in and going to do a major capital improvement on.

If you are 20-40 years of age and plan on continuing on working at your current job for the next 5 years, I would suggest you take out a loan from your 401K or retirement that plan to be used as a down payment on your next property. I suggest this because the loan does not show up on you FICO score and the payment will automatically be coming out of your paycheck. The only caveat is you need to pay it off within 5 years, and if you leave your job before you payback the whole loan, you will get penalized.

@Jen Wells

The Interest on the HELOC would be deductible interest expense on your tax return.
For an expense to be deductible - it needs to be ordinary and necessary. Financing is normally used in the real estate industry.

The thing that changed in the tax reform was being able to use HELOC interest as an itemized deduction.
Previously, the cap of the loan was $100,000 and there was no requirement on what it needed to be used for.
Now the requirement is that the proceeds of the loan be used for some type of home repair/improvement payment.

Be careful on borrowing from your 401(k).  You will possibly pay interest on the loan.  You WILL use after tax $ to pay it back AND pay tax on it again when you're in retirement and withdraw it for use.  Double taxation, plus interest!  Might be better to take a hard money loan.

@Teresia Sayler

double taxation is normally referenced to corporations where a tax is paid by the corporation and again by the shareholder when there is a distribution.

There is nothing that screams "double taxation" with a 401K.

I would take a 401K loan over a hard money loan every time if given the option.

My reference has nothing to do with corporate taxation.  It has to do with the primary attraction of a 401k being funded with pre-tax dollars.  Once eligible for retirement you will withdraw the money and pay the resulting tax due based on your bracket at the time.  

My comment had the assumption built-in that the real estate investor would also be employed at a company that offers a 401k program.

When when you pay back a 401k loan as an employee, you are using after-tax dollars. Therefore, this would be the first round of Taxation on the money.  When you withdraw in retirement,  it is the second round of Taxation that would be due.

if you still do not agree, I would love to hear your rationale behind it thank you.