Deductions & credits


@Love2Bike wrote:

And if I used proceeds from HELOC to invest (say in stocks) and made profit from that investment, I cannot deduct HELOC interest from my investment profit as an "expense"?


This is tricky.  Yes, in theory, if you use an HELOC to purchase investments, that is "investment interest" which is tax deductible on form 4952 (not schedule A, because it was not used to improve your home).  Investment interest can be any loan used to purchase the investment, it does not have to be a loan that is specifically tied to the investment.

 

https://www.irs.gov/forms-pubs/about-form-4952

https://www.irs.gov/publications/p550

 

However, there are 2 issues that make this more complicated.

First, if declare that the HELOC is investment interest and not home mortgage interest, then it can never be home mortgage interest again.  You can "uncouple" the HELOC from the home and treat it as an unsecured loan, but you can't go back later and recouple it. So if you decided in the future to use the HELOC for an improvement that would normally qualify for the mortgage interest deduction, you can't use that deduction any more.

 

Second, you must be able to accurately trace and allocate the interest to the investment and prove it is not for anything else.  For example, if you borrow $50K on your HELOC to purchase an investment and you have no other outstanding HELOC balances, then you can easily trace and allocate 100% of the interest to the investment.  However, if you were to use part of the HELOC to pay off credit cards, or take a vacation, or make home improvements, then you start mixing money and it becomes much harder to allocate a specific dollar of interest to the investment, and therefore much more likely that you could lose the deduction if audited.