HELOC interest deduction - New Tax Law

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HELOC interest deduction - New Tax Law

Alik Levin
Property Manager · Scottsdale, AZ · Member since 2016 · 66 posts · 8 votes

Dear all,

What's the definitive answer - and preferably pointer to authoritative resource - regarding deductability of interest on HELOC with the passage of new Tax Law?

I do realize that HELOC interest deduction now only limited to personal residence home improvement expenses.

But is it also true using HELOC on real estate investment other than your personal residence is NOT deductible even for the first $100K borrowed?

Thank you

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
8y

@Alik Levin , 

No, if you use the HELCO for the business activities, the interest on the HELCO is deductible as business interest expense. (This has never been changed).  The HELCO is no different than any other business Loan that you take out of the business activities. 

For eg., if you had a home depot card that you use for rehab, the interest on the loan that you used to rehab the property is a business expense.  If the proceeds are used for a personal purpose, the interest is not deductible. 

So, you can use the proceed for 

1) Rental activities - the interest would go against rental income or capitalize depending on how it was used. 

2) investment - the interest would be investment interest expense 

3) Trade or business - interest would be a trade or business interest expense. (There are some Limitation here)

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y

    @Alik Levin , 

    No, if you use the HELCO for the business activities, the interest on the HELCO is deductible as business interest expense. (This has never been changed).  The HELCO is no different than any other business Loan that you take out of the business activities. 

    For eg., if you had a home depot card that you use for rehab, the interest on the loan that you used to rehab the property is a business expense.  If the proceeds are used for a personal purpose, the interest is not deductible. 

    So, you can use the proceed for 

    1) Rental activities - the interest would go against rental income or capitalize depending on how it was used. 

    2) investment - the interest would be investment interest expense 

    3) Trade or business - interest would be a trade or business interest expense. (There are some Limitation here)

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  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    Beginning in 2018, taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. These are down from the prior limits of $1 million, or $500,000 for a married taxpayer filing a separate return. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.

    2Reply
  • Alik Levin
    OP
    Property Manager · Scottsdale, AZ · Member since 2016 · 66 posts · 8 votes
    8y

    @Ashish Acharya, very resourceful. 

    Help me get further clarity. 

    Here is an example.

    In 2017 I used $150K using personal residence HELOC as down payment for rental SFR. Since I used the funds for something other than personal residence I was able to deduct interest ($5K) accrued only on the first $100K of the borrowed $150K when I was filing my 2017 tax return few weeks back.

    It's 2018 and I am doing the same, borrowing $150K from my personal residence HELOC to purchase rental property. How much would I be able to deduct when I will be filing my 2018 Tax Return in 2019?

    Thank you!

    2Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y

    @Alik Levin ,

    Excellent question: Ok let me clarify this: 

    If you were a normal Taxpayer than the interest on the HELCO loan used to improve your primary residence is still deductible under new tax laws. This use of the HELCO is capped at 100k.  This is IRS being nice to people and letting them deduct the interest that would normally be deducted. Personal interest in the personal activities is not deductible. 

    For business, HELCO is just like another loan (it is similar to the money you borrowed from the hard money lender, or your friends, or another bank as a mortgage.) If the funds are used for the business/rental/investment purposes, the interest on the entire amount ( not limited to 100k - as in HECLO for a normal taxpayer who does not conduct a business) 

    You should not be limited to 100k. the 100k Limit is for the HELCO loan that is used to improve the personal residence.  

    Full interest can be deducted on the full 150k (Both 2017 and 2018) if the amount is used for business/rental transactions. 

    Does that make sense?

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  • Andy J.
    Ashburn, VA · Member since 2016 · 7 posts · 2 votes
    8y

    I'm looking to use HELOC on my existing primary (which I plan to convert to a rental) to fund the down payment on what will become my new primary residence. Would the interest on the HELOC be tax deductible? If yes, what would be the limits here - 100k? Also, would this go as a line item deduction on my soon-to-be rentals schedule E as a business expense or get attached my itemized deductions on my new primary instead? Trying to see how I make this still work in my favor by being able to deduct the interest

    Thanks in advance for your response.

    Cheers!

    AJ

    0Reply
  • Alik Levin
    OP
    Property Manager · Scottsdale, AZ · Member since 2016 · 66 posts · 8 votes
    8y

    AJ, that's exactly what I did and in 2017 (before new tax law) it was limited to $100K and I deducted its interest as line item on itemized deduction per advice of the CPA from TurboTax and that was inline with my understanding as well and in line with other star CPA's such as Tom Wheelwright and others. 

    In 2018? I am not sure how it works and that was the very question I asked here. What's I am sure about is in 2018 I am going to use HELOC on primary for purchasing more rentals, no doubt. So good guidance is still in order. Brandon Hall, another start CPA and very active on BP is the one who's advice I would follow.

    1Reply
  • Andy J.
    Ashburn, VA · Member since 2016 · 7 posts · 2 votes
    8y

    Thanks @Alik Levin. Yes @Brandon Hall & @Ashish Acharya have been great with their advice on such topics! Looking for some pointers on how the treatment is changing for HELOCs in such cases with the new tax law. Any inputs much appreciated!

    1Reply
  • Alik Levin
    OP
    Property Manager · Scottsdale, AZ · Member since 2016 · 66 posts · 8 votes
    8y

    Correction. Brandon Hall is a star, not a start, CPA :)

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y

    @Andy J. and @Alik Levin

    Your confusion comes from mixing together these two completely separate issues:

    1. personal deduction on Schedule A
    2. business deduction on Schedule E (rentals) or C (flips)

    If your loan is used for investment/business purposes, the interest is fully deductible against the corresponding property on Schedule E or C. As @Ashish Acharya said, it does not matter where the loan comes from: mortgage, HELOC, private loan, credit card or whatever else. It also does not matter whether or not the loan is secured by the investment property. No limit on the size of the loan. Also, this rule has not changed. It existed before the tax reform, and it still stands.

    What the tax reform changed is the ability to deduct HELOC interest on Schedule A, as a personal itemized deduction. In the past, you could deduct interest of up to $100k of HELOC on Schedule A, no matter what it was used for. You could use it to buy a car, pay for college or fund a vacation. This deduction is gone. You cannot deduct a new HELOC, and you cannot deduct even an existing HELOC. 

    One exception is: you can still deduct interest on a HELOC used to improve the residence that it is secured by.

    Andy, your plan does not work, and possibly for two reasons. I just mentioned the first: it's a down payment for Home B but secured by Home A. The other reason is that the tax reform doubled the standard deduction and restricted many itemized deductions, so you may no longer be using itemized deductions anyway - making the deductibility of HELOC irrelevant. It still could be a smart way to borrow, even without a tax deduction, provided that it does not violate the lending rules: check whether you may be prohibited from using borrowed money for a down payment.

    4Reply
  • Fred K.
    Investor · Richmond, VA · Member since 2014 · 3 posts · 2 votes
    8y

    We want to take a heloc on our personal residence to pay off one of our rental properties.  Would the interest on this still  be deducted on our schele E.  Or would we loose the deduction because of the new tax law?

    0Reply
  • Alik Levin
    OP
    Property Manager · Scottsdale, AZ · Member since 2016 · 66 posts · 8 votes
    8y

    Don't think it's deductible since it's not used for the property securing the HELOC. I am Not tax professional though.

    0Reply
  • Jeff Eisman
    Member since 2018 · 2 posts · 0 votes
    8y

    I am looking at taking out a HELOC on a rental property and using it for home improvements on the Rental Property and my Primary residence. I am also thinking about using part of it to pay down my primary residence mortgage. Under the new law can I deduct any of the interest? Thanks in advance

    0Reply
  • Santhi Mani
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 30 posts · 9 votes
    7y

    IRS given examples : https://www.irs.gov/newsroom/interest-on-home-equi...

    0Reply
  • Kyler Pace
    Sherwood, OR · Member since 2015 · 34 posts · 11 votes
    7y

    Hey everyone, I have kind of a unique situation for my HELOC. It was new last summer, and I used the proceeds to pay off a silent second mortgage. Is that interest still deductible?

    Thanks for your input!

    0Reply
  • Julie Christiansen
    Investor · Oakland, CA · Member since 2014 · 4 posts · 0 votes
    7y

    If you use the HELOC on your primary residence to make real estate loans (hard money), is the interest accrued deductible since it was related to a lending business? The business does not have it's own EIN as a I do as a sole proprietor.

    0Reply
  • Akshay Uppal
    Member since 2018 · 5 posts · 0 votes
    7y

    Thanks.

    0Reply
  • Ish Ahmed
    Member since 2019 · 1 post · 0 votes
    7y

    I have an unique scenario. I took a HELOC as a second loan (104K) at the time of new home purchase. I made some deposits to reduce the balance and also withdrawal to buy a new car. Now the balance is 45K (after multiple deposits and withdrawal). The purpose of original HELOC was part of the new home purchase.

    Would my entire interest be deductible?

    0Reply
  • Eamonn McElroy
    Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Ish Ahmed

    Purpose and intent doesn't matter.  What actually happened matters.

    The interest needs to be traced.

    If you bought a car with some of the loan proceeds, the interest allocable to that is personal in nature and not tax deductible.  Unless the vehicle is used in a trade or business...

    0Reply
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