for the year you borrow the money and put it into a CD you must include an election with your return not to treat is as secured debt. The election is under reg 1.163-10T(o)(5)(i). it is not revocable without IRS permission. the reason this election is necessary is that interest on HELOC, secured by the residence, and not used to improve the property, is not be deductible.
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since the money first goes in CD. the interest expense for those 6 months would be investment interest expense deductible using form 4952 only if you itemize and only to the extent that investment income for the year exceeds the interest expense for those 6 months. Any excess is a carryover. after that the tracing rules say when the proceeds of a loan are shifted to a new use, the interest on that debt must be reallocated to that new use. this would occur when the CD is cash in and the proceeds go directly to purchase the rental.
(another reason for the original election. without it the interest would not be deductible as an expense of the rental property)
example
Election statement under Temp. Regs. Sec. 1.163-10T(o)(5) to treat debt as not secured by a qualified residence
Taxpayer name: J Soc. Sec. No.: 999-99-9999 Form 1040, tax year ending 12/31/XX
The taxpayer elects to treat $$$$$$ of home-equity debt, the proceeds of which were used to purchase a CD as investment interest. The interest on this debt for the term of the CD was $$$$$$$ and is claimed on form 4952.
Subsequently the CD matured and the proceeds were used to purchase rental property. Interest paid on the debt has been reallocated to the new use and was $$$$$
