Is Interest on a Rental Property HELOC Tax Deductible?

3 Replies

I'm getting a HELOC on a rental property I own and I'm wondering if I'll be able to deduct the interest on my taxes. I plan to use the funds exclusively for the purchase of rental properties and/or flips and related investing activities. I read the answers to a similar question here: https://www.biggerpockets.com/forums/51/topics/436....  

However, that thread dealt with HELOCs on a primary residence, which is a different situation than the one I'm facing.  Any help with this question is appreciated.

@Kyle Steiner

Honestly, if you were using the fund in the business, it is beneficial to elect out of the HELOC itemized interest deduction because you can deduct the interest expense as a business, it is more beneficial.

Meaning, while you can treat interest expense from up to $100,000 of home equity debt as qualified residence interest, sometimes if the debt proceeds are used in the business activities such as flipping, then the interest is fully deductible. In these cases, it is better to treat the interest expense under the general tracing rules rather than under the home equity debt rules.

Possible benefits include a reduction in

(a) self-employment taxes and

(b) AGI, for purposes such as the passive loss allowance for rental real estate, the itemized deduction phase-out, and other AGI-sensitive items.

Also, 

Is it really HELCO or is it just a cash-out refinance of the house where you had equity build up.

HELCO must be secured by a qualified residence. A qualified residence can be the taxpayer's principal residence and one other residence selected by the taxpayer for the tax year. Thus, interest related to HELCO on the qualified residence is deductible no matter how you use the fund. ( It can be used for personal purpose and it would still be deductible)

If its a refinance, there are interest tracing rules and refinancing the house makes it little more complicated.

Nonetheless interest is still deductible as the business expense if you use the fund towards the business (as business expense) or investing activities( as investment interest activities).

Thanks for your response @Ashish Acharya .  This is a Equity Credit Line on a rental property, it is not being collateralized by a qualified residence.  It's not a cash-out refinance.  It sounds like using the general tracing rules, I'll be able to deduct this interest on my taxes.  Is that correct?

Also, if I understand correctly, since this is not a loan on a qualified residence, if I hypothetically decided use the funds for something other than business or investment activity, the interest related to that use of funds would not be deductible.

Yeah, personal use of the fund will not qualify for business deduction or itemized deduction.

If it were helco, personal use would also would deductible.