HELOC Interest Deductibility Used to Purchase Rental Properties

5 Replies

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?

You have to use the Interest tracing rules to assign it to the rentals and should take the portion relating to the rentals on Schedule E.

See:
https://www.law.cornell.edu/cfr/text/26/1.163-8T

https://borelassociates.com/wp-content/uploads/201...

I can't answer the first question, but having done this myself before I kept life simple and went directly from HELOC to closing - i.e., I wrote my closing check against my line of credit. The paper trail was easy and there was no question where the funds went. (Knock on wood!) My tax returns have all come back clean so far.

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The borel associates website posted mentions a written election is to be made to declare interest on Schedule E rather than Sch A.  I am having trouble finding a sample of this.  

I took a look at interest tracing rules, and understand the tracing of interest to different categories of activities (personal, business, passive activity, etc.) So I know that all of mine is traced to passive rental activities, but to allocate between the rentals themselves, I am thinking to breakdown the HELOC loan proceeds by amount borrowed per property, and calculate an exact interest paid amount for each, based on when I purchased each home.

I am still unsure about the 100K limitation. My HELOC loan is over 100K.

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.