@Agustin10 wrote:
Thanks Opus, let me go the extra mile since that is clear. We did turn House A into short term rental (AirBandB and Verbo), can I expense the HEL mortgage interest as an expense since to do that I had to move out of House A?
Agustin
Probably not. You run into something called the tracing rule. If you take out a loan from your rental property, it has to benefit the rental property to be a rental expense. (Trace the money to the expense.).
Usually this happens the other way. Suppose you borrow from house A to build house B, and house B is the rental. You can deduct the interest on house A as a house B rental expense, provided you can trace the dollars from one to the other. If you were to use the HELOC on house A for the rental house B, and also to remodel house A or take a vacation, you muddy the waters and make it much harder to support the expense using the tracing rule.
But in this case, the mortgage on A was used to build house B, and then A is the rental. So the interest is not deductible as home interest for A (was not used to build A), is not deductible as home interest on B (not secured by B) and not deductible as a rental expense on A (because the loan proceeds did not benefit A as a rental.)
