Let's restate the case for simplicity
House A is the current MAIN home and has a lot of equity. It will eventually be a rental.
House B is the current SECOND home, will have major renovations and will eventually be the PRIMARY Home.
if a HELOC is a lien against Property A, is the interest tax deductible? NO. Because the dollars need to be used on Property A to buy, build, or substantially improve [our] home.
Page 9: Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). It must also be secured by
that home
So taking out equity in the form of a HELOC from Property A and not using the money on the very same property would not qualify as 'aquisition debt'. So it is NOT tax-deductible.
But what about when Property A becomes a rental? is the Interest from the HELOC tax reductible on SCHEDULE E? NO. Look at the definition of 'qualified home'
Page 4:
The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and isn't deductible.
Since the proceeds of the loan were not used for business, investment or other dedutible purposes, the interest is not deductible on SCHEDULE E.
Best bet would be to take out a home improvement loan / construction loan on Property B to preserve the tax dedutibility of the interest. You'd have to run the numbers to see if the higher interest rate related to a mortgage on Property B, net of the tax savings is a better deal than taking out a HELOC that is not tax-deductible on Property A.
https://www.irs.gov/pub/irs-pdf/p936.pdf
