HELOC interest no longer deductible for tax purposes

Buying & Selling Real Estate
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HELOC interest no longer deductible for tax purposes

Michinori Kaneko
Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes

Hi, 

Looks like taking out HELOC to purchase additional investment property is not as beneficial any more (still beneficial! just not as). The interest paid on HELOC to purchase investment property is no longer tax deductible. You can read IRS guidance here.  Still ok to use HELOC to buy with cash, the immediately refinancing the mortgage on the property to pay back HELOC. Just posting as an FYI for everyone out there.

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  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    7y
    Originally posted by @Michinori Kaneko:

    The interest paid on HELOC to purchase investment property is no longer tax deductible.

    That's not correct. If you have a HELOC and use that to purchase an investment property, the interest paid on that HELOC for the purchase of that investment property is still deductible.

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  • Michinori Kaneko
    OP
    Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
    7y

    did you read the example #2 in the article i posted? I am assuming that vacation homes and investment properties are treated the same way. please let me know if that's not correct. 

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7y

    @Michinori Kaneko

    Vacation homes and investment properties are not treated the same way.

    @Kyle J. is correct. If you take a HELOC on a property to purchase a rental property, it will be deductible when calculating the net rental income. It depends on what the funds are used for. If the funds are used for personal purposes, then it is not deductible. It it is used to purchase a rental property, it is deductible.

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  • Michinori Kaneko
    OP
    Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
    7y

    @Basit Siddiqi I'm seeing multiple articles saying that it is not tax deductible anymore unless you use it to improve the house that is the collateral of the HELOC under the new tax law. What is your source, can ?

    here are few links:

    example 1

    example 2

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  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    7y

    @Michinori Kaneko

    I am pretty sure you can still do it but the difference is that it needs to be directly linked to an investment that makes money or business venture.

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  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    7y
    Originally posted by @Michinori Kaneko:

    @Basit Siddiqi I'm seeing multiple articles saying that it is not tax deductible anymore unless you use it to improve the house that is the collateral of the HELOC under the new tax law. What is your source, can ?

    Check out this thread, specifically the detailed response by @Michael Plaks: https://www.biggerpockets.com/forums/51/topics/548982-heloc-interest-deduction-new-tax-law

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  • Michinori Kaneko
    OP
    Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
    7y

    Thanks @Kyle J. I haven't seen a concrete guidance from IRS about it, but I did come across few other articles that stated similar things that Michael mentioned.  I was going to borrow from my primary resident to buy additional investment properties, but I guess the bigger question like Michael mentioned is whether you are still itemizing or not based on increased standard deduction.  I guess if you have lots of loans and interests you can still deduct!

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  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    7y
    Originally posted by @Michinori Kaneko:

    Thanks @Kyle J. I haven't seen a concrete guidance from IRS about it, but I did come across few other articles that stated similar things that Michael mentioned.  I was going to borrow from my primary resident to buy additional investment properties, but I guess the bigger question like Michael mentioned is whether you are still itemizing or not based on increased standard deduction.  I guess if you have lots of loans and interests you can still deduct!

    You're killing me....you also misunderstood that post.  The increased standard deduction is irrelevant because that's for PERSONAL itemized deductions (Schedule A).  You're talking about interest paid for the sole purpose of purchasing a rental property, which is a BUSINESS expense and still deductible on Schedule E.  You don't need "lots of loans" either. 

    I get it, taxes are complicated and I'm no expert.  So just do what I do and pay a professional to do them for you.

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  • Michinori Kaneko
    OP
    Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
    7y

    ahhhh makes sense. funny enough i studied about these stuff long time ago for my CPA license, but haven't used it since so i've forgotten all about them.  This year will be the first time i file taxes using Schedule E.  guess I will have to rely on professionals who specializes in taxes this year :)

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    7y

    Try googling "Interest Tracing Rules" - this is what allows you to deduct HELOC interest if it is used for investment or business purposes.

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