HELOC interest expense deduction

6 Replies

Hi - From what I've been reading there are restrictions on HELOC interest expense deductions. Does anyone know if I take out a HELOC on my primary residence and draw funds to purchase/improve rental property (1) will the interest be deductible? and (2) will it be subject to the $750k (first mortgage and HELOC) cap?

I can't seem to find any guidance on my question specifically, and what I find says that HELOC funds must be used to buy, build, improve the taxpayers qualified residences (primary and second home) and cannot exceed $750k. So drawing funds to purchase rental property would not qualify?

Thank you!

  

From my understanding it was deductible until this new law has passed. I am not sure on the details though

@Karen Lee

  • If you Use HELCO for rental activity there is no restriction. Also, there is no cap on the amount of the loan you get an interest deduction for either.  the interest is treated as Schedule E rental expense rather than Schedule A itemized personal HELCO loan used to improve Primary residence. 
  • No, it does not count toward your 750k cap. 

To clarify, Going forward, the HELCO interest is NOT deductible after 2018 unless you use the fund to substantially improve your main or second principle home. Before tax reform, you could deduct interest on HELCO loan no matter how you used the fund. ( for eg you could use that money for rental or personal expenses )

For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses—such as credit card debts—is not.

Using the loan for a Rental activity does not qualify for interest deduction in your Schedule A as an itemized deduction.  However, the interest will qualify as schedule E deduction as business interest as you are using the fund for rental properties. There is an interest tracing rule for that.

Hope that helps

 @Steven Hamilton II , I would assume using a HELOC on your personal property to finance a flip isn't deductible for the interest in that case; with the new tax laws?

Thank you!

Rich Anderson

Originally posted by @Richard Anderson :

 @Steven Hamilton II , I would assume using a HELOC on your personal property to finance a flip isn't deductible for the interest in that case; with the new tax laws?

Thank you!

Rich Anderson

It is deductible, provided you can show that the loan was specifically used for the flip and not for anything else. This is called "interest tracing."

The confusion comes from focusing on an incomplete sentence about HELOC: "not deductible." It is "not deductible as a personal itemized deduction." It is still deductible as a business deduction if used for buying an investment property.

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