Used heloc for down payment. Is the interest tax deductible

6 Replies

Hello BP family,

I have used my heloc, backed by my RESIDENTIAL property, to buy a rental investment property. I'm doing income and expense for this rental property for 2020 taxes. Is the interest paid on the heloc deductible towards the rental property's.

Thank you, 

1) HELOC interest is tax deductible only if you use the money for renovations to the home whose equity is the source of the loan.

2) The IRS will likely never know. 

Greg, sorry that's not correct. Interest tracing rules apply and the HELOC interest can be deducted against the rental property it was used to purchase.

Originally posted by @Matt Devincenzo :

Greg, sorry that's not correct. Interest tracing rules apply and the HELOC interest can be deducted against the rental property it was used to purchase.

President Trump's Tax Cuts and Jobs Act of 2017 requires HELOC funds to be spent on the property whose equity was being tapped in order to deduct the interest. 

@Greg M.

There're two kinds of interest: personal and business/investment. The Trump tax reform indeed changed the rules for deductibility of HELOC as a personal interest, as you correctly pointed out.

However, it did not change any rule related to the deductibility of business/investment interest, as @Matt Devincenzo correctly pointed out. You can still fully deduct business/investment interest regardless of the source of the borrowed funds and regardless of collateral. 

It could be a traditional secured mortgage, a HELOC, a credit card debt, an unsecured personal loan, a life insurance loan - all of that interest is fully deductible against a rental property as long as it is clearly connected to such property.