San Diego, CA · Member since 2015 · 7 posts · 0 votes
Hi
I live in California. I took out a HELOC on my primary residence and used the funds as a deposit on another property which then became my primary residence. The previous primary residence was converted into a rental property and a lien was recorded against that rental property for the HELOC.
At tax time, can I attribute the HELOC interest to my primary residence and claim the deduction?
Yes. At tax time the interest on you HELOC is tax deductible. I have funded lots of deals with my HELOC. Once I have acquired a property I start paying down my line of credit so it is available to me again if needed. At the end of the year my bank sends me a form stating how much interest I paid on the HELOC and then I give it to my tax guy. Hope this helps.
Yes. At tax time the interest on you HELOC is tax deductible. I have funded lots of deals with my HELOC. Once I have acquired a property I start paying down my line of credit so it is available to me again if needed. At the end of the year my bank sends me a form stating how much interest I paid on the HELOC and then I give it to my tax guy. Hope this helps.
Yes. At tax time the interest on you HELOC is tax deductible. I have funded lots of deals with my HELOC. Once I have acquired a property I start paying down my line of credit so it is available to me again if needed. At the end of the year my bank sends me a form stating how much interest I paid on the HELOC and then I give it to my tax guy. Hope this helps.
No it does not matter. A HELOC is tax deductible no matter what it is used for.
I'm still confused..... I thought I was asking the right question but perhaps I'm not so I will try again.
I understand that the interest is deductible no matter what it is used for but is it a deduction against my Primary or against my Rental??? This is the question I'm trying to answer. Please read the following.
When I get my HELOC statement from the bank at the end of the year it will show the address of the property and that address is the address of the rental property. So, I know it's deductible BUT is it a deduction against the rental OR is it a deduction against the Primary?
I believe there is a difference...am I wrong?
If it is against the rental it increases the loss that I carry forward so has no real impact to me at tax time. If it is against my primary residence I get an immediate benefit and reduction in my tax.
The deduction goes on your itemized returns if the HELOC is for your primary res. If the HELOC is for your rental, it will go on your schedule E (line 12).
6 of 1, half dozen of the other. Net benefit to you is the same. Get an accountant.
You lived in property A. You took out a HELOC on property A to for the down payment to buy property B. You then moved into property B, your current residence.
?
From the point of view of property the HELOC does not qualify as mortgage debt for property B.
If you own rental property and borrow against it to buy a home, the interest does not qualify as mortgage interest because the loan is not secured by the home itself. Interest paid on that loan can't be deducted as a rental expense either, because the funds were not used for the rental property. The interest expense is actually considered personal interest, which is no longer deductible.
I am not sure that it is this bad - I think it can be applied to property A, but I would double check with a tax professional.
The deduction goes on your itemized returns if the HELOC is for your primary res. If the HELOC is for your rental, it will go on your schedule E (line 12).
6 of 1, half dozen of the other. Net benefit to you is the same. Get an accountant.
It clearly can't be included as primary home mortgage interest. Can it be applied to the rental property since the funds were not used on that property? I think the advice to get an accountant is good.
You lived in property A. You took out a HELOC on property A to for the down payment to buy property B. You then moved into property B, your current residence.
?
From the point of view of property the HELOC does not qualify as mortgage debt for property B.
If you own rental property and borrow against it to buy a home, the interest does not qualify as mortgage interest because the loan is not secured by the home itself. Interest paid on that loan can't be deducted as a rental expense either, because the funds were not used for the rental property. The interest expense is actually considered personal interest, which is no longer deductible.
I am not sure that it is this bad - I think it can be applied to property A, but I would double check with a tax professional.
Yes, Jesse that's the exact scenario I'm talking about.
I was living in A and took out a HELOC on property A to buy property B. I then moved into property B, making it my primary residence, and converted property A into a rental. A lien was recorded on the title of Property A and the 1098 at year end will show the loan being on Property A. The purpose of the HELOC was to buy my primary residence so it "Feels" right to be able to claim the interest cost but I suspect it probably doesn't work like that. I think I'll try to take out a HELOC on property B to pay back the HELOC on A. That way I'll have a Lien recorded against property B and be good to go.
Any resolution to this? I'm in the exact same situation as this but can't find someone that has already contacted a CPA. I saw the excerpt from TurboTax but it certainly seems like it should be deductible. I imagine Bigger Pockets members would have encountered this situation many times before!
@John Hastie and @Aaron Helms if the HELOC is taken against your home, then you get the home mortgage deduction. If it is taken against a rental property, it becomes a rental mortgage deduction. This is exactly what @Mark Bookhagen already stated. Either way you get the deduction, but put it in the correct category on your taxes. I would recommend having a CPA do your taxes for this and many other reasons.
Thanks @Joe Splitrock... unfortunately, Intuit disagrees with Mark and specifically states,
"If you own rental property and borrow against it to buy a home, the interest does not qualify as mortgage interest because the loan is not secured by the home itself. Interest paid on that loan can't be deducted as a rental expense either, because the funds were not used for the rental property. The interest expense is actually considered personal interest, which is no longer deductible."
That's why I was wondering if someone had already clarified this with a CPA since I'm sure many people have been in this situation before.
@Aaron Helms, I was under the impression that any HELOC interest was deductible until @Brandon Hall set me straight. I don't remember the details, just that I was not correct.
I will add that if Intuit is you CPA you are going to have problems in this business. You really need to find one who understands real estate. They will save you a ton of money and you won't have to pay them to restate several years of tax returns that you and intuit did together.
Thanks @Joe Splitrock... unfortunately, Intuit disagrees with Mark and specifically states,
"If you own rental property and borrow against it to buy a home, the interest does not qualify as mortgage interest because the loan is not secured by the home itself. Interest paid on that loan can't be deducted as a rental expense either, because the funds were not used for the rental property. The interest expense is actually considered personal interest, which is no longer deductible."
That's why I was wondering if someone had already clarified this with a CPA since I'm sure many people have been in this situation before.
Interesting... My mistake, I didn't read the original post carefully enough. I missed the part stating Mark moved out of the property with the HELOC into a property that would be his primary residence. It definitely could NOT be taken as a home mortgage deduction. It is not secured against his primary residence, so trying to claim it that way would be a violation. It also could NOT be taken as a rental property deduction because the money is not being used for purchase or improvement of a rental property. Unfortunately, I do not think there is a deduction here. You may not get caught if you claim it, but I don't think a CPA or IRS would approve given the situation. Talk to a CPA, I am not one.
No deduction seems right to me. The HELOC is not secured by your primary residence (no mortgage interest deduction) and it was not used for a business purpose (no business expense deduction).
In this scenario, could you theoretically take out a new HELOC on residence B to pay for the HELOC taken on residence A for the down payment? Essentially swapping HELOCs but now its secured by current primary residence B and therefore tax deductible.
Based on the scenario you provided the interest is not deductible.
https://www.irs.gov/publications/p936/ar02.html#en_US_2015_publink1000229900
In order for a home mortgage interest you need to have the following:
1) The interest must be based on a mortgage you took to buy, build, or improve your home and less than $1M (check)
2) The mortgage debt must be secured on a home (check)
3) The secured debt must be on a qualified home
Since your home is now a rental, this disqualifies you from taking the home mortgage interest deduction. You can follow the logic with the above IRS publication.