Fort Worth, TX · Member since 2011 · 20 posts · 10 votes
Hello BPers,
Earlier this year (May) I obtained a HELOC against a rental property that I owned free and clear. I then combined funds from that HELOC with some of my own cash to purchase another rental outright. Has anyone here done something similar and if so, how was the HELOC handled from a tax standpoint? I use TurboTax to complete my tax return each year and for each of your rental properties TurboTax usually asks "Did you refinance this property?". My assumption is that I will just say "yes" there and plug in the interest expense. Could it really be that simple or am I missing something?
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
13y
The interest expense on the HELOC should be allocated to the property that you acquired. The IRS looks at how the proceeds of the refinance were used. Of course, since you kept the funds in your rental business, this is just a technicality in how the Sch. E is prepared, and doesn't impact your tax liability. However, if you'd used the funds for personal purposes, then the interest would not be deductible at all.