You are not clear on which home will secure the equity.
If you borrow from house A to build house B, the interest is never deductible, before, during or after construction. That's because, to be deductible, the interest must be secured by the home that is being purchased or built.
If, after completing house B, you get a mortgage on house B and use it to pay off the HELOC on house A, the new loan is a deductible mortgage with the following conditions:
A. The loan is only deductible if you take out the new loan before completing construction or within 90 days after completing construction, AND
B. You can only deduct the percentage of the loan used to pay costs incurred up to 24 months before the loan was taken out. If construction took more than 24 months, you can only deduct part of the interest.
If you get a construction loan for house B that is secured by that property, the interest is deductible from day 1, as long as you complete construction within 2 years and convert the construction loan to a regular mortgage. (If you fail to complete construction within 2 years, you may have to file amended returns to remove prior interest deductions.)
This answer has been verified for accuracy by an Intuit expert employee
