So to summarize, the answer to (1) is yes, and the answer to (2) is "yes and requires an irrevocable election to be made". Is that right?
Secondly, do you have a sense for question (3)? "NCperson" discussed it in a separate response, and I clarified the question in response.
Thank you!
@Mike9241 wrote:
if the original HELOC is on property 1 the tracing rules Reg Section 1.163-8T(a)(3)
would say you allocate and deduct
if on your home see this link
https://www.taxcpe.com/blogs/news/tracing-rules-that-apply-for-deductibility-of-interest
the thing is that if the election specified isn't made then based on current law (this article was written before the rules for deductibility of HELOC were changed effective for the 2018 tax year) without the election none of the interest would be deductible since the funds weren't used on the residence.
see examples 2a and 2b the election is per reg sec 1.163-10T(o)(5)(i)
How to make the election
An election statement should be attached with the tax return in the year the debt is acquired. The tax code does not specify any specific format so simply attaching a note that states the intention will be sufficient. Here is an example:
Election Pursuant to Regulation 1.163-10T (o) (5) to Treat Debt as Not Secured by a Qualified Residence
20XX Form 1040
(Taxpayer's name) SSN XXX-XX-XXXX elects to treat $ amount of home equity indebtedness, the proceeds of which were used to purchase ........ (specify) as rental activity indebtedness.
The interest on this indebtedness for the tax year was $X, 000 and is being claimed on line 12 of the Schedule E.
