@Vic14 wrote:
Thanks for clarifying this. What if I use HELOC secured by my principal residence to pay for down payment on investment property? I will use entire HELOC proceed for down payment and not mix with other payments. Will the HELOC interest be considered investment interest?
As stated, to treat the loan interest as investment interest, you must elect to treat the loan as not secured by your home. This means you can't deduct it as mortgage interest on schedule A, now or in the future.
Second, you must meet the tracing rules, or to say it another way, you must be able to prove that the interest is legitimately allocated to the investment property. As long as you have a single loan and all the proceeds went to the investment, it should be easy to prove that the interest can be allocated to the investment. However, if you use additional loan proceeds for other, non-investment purposes, you muddy the water and make it harder for yourself to prove, if audited, that the interest can be allocated to the investment.
