I'm thinking of using my HELOC to make an intra-family loan.
I am familiar with most of the requirements to make the intra-family loan bona fide in the eyes of the IRS, but I do have one specific question about that: I know that the interest I charge should be at least that which is published by the IRS as AFR (https://www.irs.gov/applicable-federal-rates). Say for example the AFR according to the IRS is 2%, but the interest that I have to pay on my HELOC is 3.5%. Is it okay for the interest rate on the intra-family loan to be 2% when I'm actually paying 3.5% for the cash that I've lent?
Also, I understand that HELOC interest can be deductible if used for an investment if I make the election to "choose to treat any debt secured by your qualified home as not secured by the home”
(https://www.therealestatecpa.com/blog/who-said-you-cant-de[product key removed]est-interest-tracing-...). In my case, if I'm using the HELOC to loan cash to someone else, I'm guessing the only way I can deduct my HELOC interest is if the interest rate for the private loan is greater than the interest rate I'm paying for my HELOC--is that correct? And if that is correct, and say my HELOC interest is 3.5% and the interest I charge for the private loan is 3.75%, can I deduct the full 3.5% interest that I'm paying?
