Since the $10,000 was a cash out, it would be reported as cash. The fact that it sat in your savings account and you paid interest on it makes it a non deductible part of the HELOC. So if your loan was for $100,000 and $90,000 was used to buy, build or improve your home, then you would be able to deduct 90% of the interest on that loan. You would not be able to deduct the other 10% as it does not meet the buy, build or improve requirements.
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