HELOC Interest Deductibility Used to Purchase Rental Properties

[Jennifer Bott]

We took a home equity line of credit out on our personal residence, and used 100% of the funds to buy 3 rental properties.  My first question is whether the interest deductibility is subject to the 100000 loan limit. Secondly, assuming it is not since it was all business use, how would I divide up the interest expense between the properties, all separately listed on Schedule E?

[Dave Toelkes]

The home mortgage interest deduction (Schedule A) is limited to the interest paid on the first $100K of the HELOC only if the interest can not be traced to a deductible use. For example, if you use an auto loan to buy a car, the loan interest on the auto loan is a personal expense and is not deductible. Similarly, credit card interest is not deductible. But, if you use a draw against your primary residence HELOC to buy the car, take a vacation, and pay off credit cards, then the HELOC interest on the first $100K of loan proceeds is deductible on Schedule A as a home mortgage interest deduction. When the HELOC interest is traceable to an activity where loan interest is an allowed deduction, then all of the HELOC interest allocated to that activity is deductible against that activity's income. Since all of your loan proceeds were used to acquire rental properties, you can deduct the all of the interest on Schedule E even if the HELOC loan amount exceeded $100K. Allocate the HELOC interest in proportion to the amount of the total loan proceeds used to acquire each property.