Is primary residence HELOC interest tax deductible?

Question

Hi,

I live in Washington state and I have an in-state 4-plex currently under contract with conventional financing. I plan to use one of the following options to partially fund my down payment + closing cost:

1. HELOC from my primary residence

2. 401K loan

I'll be paying back to either loan in couple of months. I'm debating which fund I should use in terms of tax efficiency + opportunity cost. Couple thoughts:

1. If I take money out from 401K, i lose some compound interest until I pay back.

2. I'm using after-tax $$$ to pay back the 401K + interest.

3. However, I'm paying back to myself with the interest rate.

4. HELOC interest is lower and is interest-only payment, so I have more flexibility on my personal cash flow.

5. Not sure if HELOC interest in this case is tax deductible or not. It's a primary residence HELOC but it's paying against a investment property.

Any advice? I'm searching on Google regarding HELOC interest tax deduction but I haven't found anything specific to my case yet.

Kevin Romines · Answer

You can still deduct HELOC interest from your primary so long as it was used to invest or to buy or use on an investment property. The link above, doesn't tell the whole story. Read this link as well.

https://finance.zacks.com/deduct-interest-equity-line-investment-property-8342.html

Basit Siddiqi · Answer

@Kin Meng SioThe rules on destructibility regarding HELOC interest changed recently.It now follows the interest tracing rules and you have to see what you use the funds for.It seems like you are using for an investment purpose and may be deductible.

Kin M. · Answer

Sounds good. I'll consult with my CPA. Thanks for your help!

Kevin Romines · Answer

There is specific language in the IRS code that allows you to deduct HELOC interest from your primary residence if it is used to acquire or maintain a rental property. Consult with a CPA to get the specifics on this.

Kin M. · Answer

Thanks @Kevin Romines. One paragraph confuse me in terms of using HELOC from primary residence, which is my case. What's your interpretation on the underlined statement below?

Home Equity Indebtedness

The Tax Cuts and Jobs Act disallows the deduction for interest on home equity loans for the 2018 through 2025 tax years. However, this disallowance only applies to home equity indebtedness, which refers to debt secured by a primary residence that isn’t used to acquire the home.

Kin M. · Answer

Thank you! That makes sense so I will probably go with 401k loan then.

Kenya Destin · Answer

HELOC interested is no longer tax deductible if it is not being used for home improvements projects on your primary resident.

Here is the like from IRS: https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law

Is primary residence HELOC interest tax deductible?

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