Deduct HELOC Interests?

Question

Question for you all in this community, can you deduct interest paid out of HELOC, which the funds were used to buy a rental property? It is my understanding under the new law, HELOC interests are not deductible for anything other than to “buy, build, or substantially improve the taxpayer’s home that secures the loan”.

In other words, you cannot deduct interests if you use HELOC funds for anything related to personal or to buy a rental property or even to rehab a property other than your property that is associated with the HELOC.

I come across one reputable site saying otherwise.

https://www.therealestatecpa.com/blog/who-said-you-cant-deduct-heloc-interest-interest-tracing-explained

Natalie Kolodij · Answer

It would still be deductible. It was used for a business purpose. Also- if you're going through an eviction it's in service. At this point expenses you incur are deductible-  income doesn't determine it being in service.

It's being used as a rental- you're actively trying to have it be in service as an income producing rental.

And if it was not in service yet you would still get to capitalize that interest and deduct it with the basis.

I would recommend consulting with a tax professional to make sure you're not missing out on deductions.

Kyle J. · Answer

I think your confusion stems from the fact that you’re asking about business deductions but looking up and citing articles (such as the Investopedia one listed above) that talk about personal deductions.

Interest paid to purchase a rental property has been, and still is, a tax deductible expense on your Schedule E whether it’s from a HELOC, mortgage or even a credit card.

As for a source, my tax attorney has confirmed it, but that probably doesn’t help you believe me. Fortunately, this has also been discussed at length here on BP with all of the CPA’s weighing in at one time or another, so search for something like “HELOC interest deduction” and I’m sure you’ll get some previous threads popping up.

Arthur C. · Answer

@Joe Splitrock

I think what you said is pretty clear. Appreciate your explanation.

It was just confusing when the new law specifically states that HELOC interests are deductible only if the HELOC funds are used to “buy, build, or substantially improve taxpayer’s home that secured the loan”. This is why I was under impression that HELOC interests may not be deductible if it were used to buy a rental property.

Yes, I do have CPA to work with. I just want to hear people’s inputs before we go through this together at the time of tax filing.

Joe Splitrock · Answer

@Arthur C. the easiest way to think about this is that deductible follows use. In other words, if you take out a HELOC and use the money to buy a rental property, the interest was used for a rental property. You claim the deduction on that rental property. Let's say you took a HELOC out on your rental property, but used the money to pay for a vacation. That interest would not be deductible.

I hope you see my point, it doesn't matter what the loan was secured against, but rather what it was used for that determines if it is deductible.

As far as whether the property is in service as a rental. It has to be available to rent and advertised to rent. I guess in your case, you could argue there is a tenant in there that is not paying rent, so it is rented. It would probably result in a 2019 tax loss, but that may be able to offset other income to reduce your tax burden.

Hire a CPA instead of just asking for free advice on the internet. (I know I just gave you free advice...)

Arthur C. · Answer

@Kyle J. Thanks.

Looks like you are correct. I asked that same question in other forum and one CPA stepped in and confirmed that it can be deductible. However, in my case, it won’t be deductible because I have no rental income produced yet and it has to be available for rent. Currently, I am going through eviction process (former owner still living in it) and I will start the rehab process once evicted and clear so it won’t be ready to rent out till in 2020.

Appreciate you stepping in and provided your inputs.

Arthur C. · Answer

@Kyle J.

Thank you for your inputs. Do you have a source to back up your claim?

See link:

https://www.investopedia.com/taxes/tax-loophole-found-homeequity-loan-interest/

Specifically, it states, “What's more, the renovations have to be made on the property on which you are taking out the home equity loan. You can't, for example, take out a loan on your primary residence and use the money to renovate your cottage at the lake.”

Looks like HELOC interests cannot be deductible if HELOC funds are used to buy a rental property.

Kyle J. · Answer

Yes, the interest would still be deductible if used to purchase a rental property. Under the Interest Tracing Rules, if you took a HELOC out on Property A to purchase rental Property B, the interest paid would be a tax deductible expense against rental Property B.

Deduct HELOC Interests?

Most Popular Reply