Remember, this taxpayer is turning the usual question upside down. The question we usually see is something like, “I want to take out a home equity loan from my paid up house to buy a second house to use as a rental.“ In that case, HELOC interest on the primary residence is no longer deductible on schedule A after the tax reform of 2018, but the interest might be deductible as an investment expense if it is traceable.
In this case, the taxpayer wants to borrow off the investment property to buy a personal residence. The traceability rule applies to the business property but not to the personal residence.
