Mortgage Interest Deduction

Forum|Forum|14 days ago
September 22, 2026
6 replies
44 views

My child owns a home worth approx $950K, with a current mortgage balance of $345k. They started an upgrade /remodel project in the amount of $300k. Due to the demolition already starting, their lender said a home appraisal is not currently available. To fill this six month cash gap, I wish to loan them the funds , and then they can repay me with a HELOC after construction is done.

Since they are paying for the construction with my bridge loan, and then obtaining the HELOC afterwards, can the interest going forward on the HELOC be used as an itemized tax deduction? If so, are there any watchouts so I can set up this arrangement correctly? Thanks.

M-MTax

Level 15

The interest on the future HELOC can be tax-deductible, but only if you strictly follow specific IRS tracing rules.

Because your child is paying for the construction upfront with a private loan and refinancing it later with a HELOC, the IRS looks at the destination of the final funds. Refinancing a construction loan into a permanent mortgage or HELOC preserves its status as home acquisition debt, provided you navigate several critical structural requirements.

M-MTax

Level 15

To ensure the IRS allows your child to deduct the HELOC interest on Schedule A, you must execute the arrangement with the following guidelines:

1. The 90-Day Rule for Construction Completion

Per IRS Notice 88-74, if a debt is incurred after a home improvement project is completed, it can only be treated as home acquisition debt if it is taken out no later than 90 days after the construction is finished. If your child waits 91 days or more after the final contractor sign-off to pull the HELOC, the IRS will classify the HELOC as a personal cash-out, making the interest entirely non-deductible.

2. Execute a Formal, Secured Intra-Family Loan

You cannot simply transfer cash to your child as an informal handshake loan.

The paperwork: You must draw up a formal promissory note specifying the loan amount, repayment terms, and an interest rate that is at least equal to the IRS Applicable Federal Rate to avoid gift-tax issues.

Note that the interest you receive from your child will be considered taxable income to you.

3. Strict "Interest Tracing" and No Commingling

The IRS is incredibly strict about tracking the flow of funds.

Action: Have your child open a brand-new, dedicated bank account with a $0 balance.

Wire your $300,000 bridge loan directly into that account.

Pay all contractors, permits, and material invoices only out of that specific account.

When the HELOC is finalized, the HELOC funds must go directly toward paying off your $300,000 note. Do not mix personal funds or general checking account money at any step.

4. Total Mortgage Debt Limits

Home acquisition debt interest is capped on a combined total balance of $750,000 for single filers or married couples filing jointly.

Your child's current mortgage: $345,000

Your child's planned HELOC: $300,000

Combined total debt: $645,000

Because $645,000 is under the $750,000 threshold, 100% of the qualifying HELOC interest will be eligible for deduction, assuming your child chooses to itemize deductions rather than taking the standard deduction.

mmbowmAuthor

Level 2

Thank you for all the pertinent info!!

Mike9241

Level 15

for interest on loans related to this property to be deductible, they must be secured by the property. code Section 7872 deals with intra-family debt. on your personal loan, there must be interest charge. If the not you have imputed interest income.

IRC 7872

It would also seem that some of the interest may not be deductible because of the $1M cap on acquisition debt which includes the original debt + debt on capital improvements. There is also the issue of wether your loan would be treated as a construction loan which also has some special rules .

this is something you may want to discuss with a tax pro because of the effect on you and your son.

Mike9241

M-MTax

Level 15

It would also seem that some of the interest may not be deductible because of the $1M cap on acquisition debt which includes the original debt + debt on capital improvements.

This looks to be a total of $645,000, well under $1M