Generally, it will depend upon whether or not the LLC is considered to be a passive activity (in your particular case) and, typically, you can only deduct investment interest to the extent of investment income.
As I said, I work for the LLC. I thought that meant it is NOT passive. Is this a bad assumption?
Are you a member of the LLC? Do you materially participate?
If you are investing in your own business, that is entirely different.
I thought that a Home Equity Line of Credit could only be secured by a personal residence and only the interest used to buy, build, or substantially improve the home would be deductible. Did I assume incorrectly?
It actually depends upon how the proceeds are used.
See https://www.irs.gov/publications/p535#idm140359417955280
However, you are correct in the sense that one can only deduct the interest as mortgage interest on Schedule A if the proceeds are used buy, build, or substantially improve the home. On the other hand, through tracing, the interest may be deductible elsewhere.
if the tracing concept is acceptable, can you rationalize this?
please look at example #2..... tracing doesn't work in this example....
https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law
and see example 4 in this link - tracing does not work
https://www.taxcpe.com/blogs/news/tracing-rules-that-apply-for-deductibility-of-interest
<< It actually depends upon how the proceeds are used.>>
I think the tracing argument is predicated on where the money came from, not where it is to be used
You get a difference answer if you assume the tracing is predicated on where the funds are used!
so if you cash out refi on a primary home and use it to purchase a rental property, the interest is NOT deductible because the tracing points to where the money came from (the cash out refi where there was no purchase or improvement to the primary home) and not where it was used (the rental property).
thoughts?
The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities.
Same link: https://www.irs.gov/publications/p535#idm140359417955280
Treas. Reg. §1.163-8T(a)(3): Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures
sorry, but I don't see how the document you reference supports the case
1) can you please provide the specific paragraph and sentence of publication 936 that supports tracing when secured debt on residential real estate is involved?
2) Treas. Reg. §1.163-8T(a)(3): what specifically in this document supports secured debt on residential real estate? There is a specific reference to (6) Special rules—(i) Qualified residence debt. [Reserved]
Lastly, if tracing rules do apply, then why does the IRS provide the following example which would NOT support tracing.
Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not
https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law
if it very clear from this link that the secured debt must be used to buy, build or substantially improve the taxpayer’s home that secures the loan in order for the interest to be deductible.
that may be the 'special rules' for secured debt on qualified residential real estate - you CAN NOT trace the debt for any other use
On that basis, what is the evidence that proceeds on secured debt on a qualified residence can be used to invest in a business / LLC , another residential property or stock trading activity when the IRS specifically states the "the secured debt must be used to buy, build or substantially improve the taxpayer’s home that secures the loan"
what am I missing is evidence that logically supports that interest from a HELOC can be considered deductible if the proceeds are invested into a LLC. the references provided are very broad and I do not see how they are 'on point'
thx
i don't know why this site keeps comproming the link I provided.
suggest googling the words and you'll find the entire article:
interest home equity loans often still deductible under new law
it's posted in the IRS.gov newsroom
Is this the IRS link you are referring to? - https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law
@NCperson wrote:1) can you please provide the specific paragraph and sentence of publication 936 that supports tracing when secured debt on residential real estate is involved?
https://www.irs.gov/publications/p936#en_US_2018_publink1000229982
Mortgage proceeds used for business or investment.
If your home mortgage interest deduction is limited under the rules explained in Part II, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. It shows where to deduct the part of your excess interest that is for those activities.
@NCperson wrote:Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would
not
be deductible.
".....would not be deductible" ON SCHEDULE A.
Your confusion is the result of what constitutes interest that is deductible on Schedule A as home mortgage interest (or investment interest) and interest that is deductible elsewhere on a return.
how do you rationalize the example below? (from the link I provided earlier in the thread) similar to the IRS example, the answer is that it is not deductible. In neither example does the author add the further clarifier that it's 'not deductible on Schedule A'. In fact, in this example the author states it is not deductible
anywhere
Example 4: The taxpayer owns a rental property free and clear and wants to purchase a home. So he obtains a loan on the rental to purchase the home. Under the tracing rules the taxpayer must trace the use of the funds to their use, and since the debt was not used to acquire the rental, the interest on the loan cannot be deducted as rental interest. The funds can be traced to the purchase of the taxpayer’s home. However, for interest to be deductible as home mortgage interest the debt must be secured by the home, which it is not.
Result: the interest is not deductibleanywhere
.
here is where i still see the logic breaking down. While I appreciate the language you pointed me to in publication 936:
Mortgage proceeds used for business or investment.
If your home mortgage interest deduction is limited under the rules explained in Part II, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. It shows where to deduct the part of your excess interest that is for those activities.
if it's limited as part of the Part II rules, you can deduct the interest elsewhere and I agree with that. But the Part II rules relate to the loan limits (e.g $750,000 now, $1mm previously, etc.) and not the requirements found in Part I.
"Y ou can deduct home mortgage interest if all the following conditions are met. • You file Form 1040 and itemize deductions on Schedule A (Form 1040). • The mortgage is a secured debt on a qualified home in which you have an ownership interest. Secured Debt and Qualified Home are explained later.
Note. Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. As under prior law, the loan must be secured by the taxpayer’s main home or second home (qualified residence), not exceed the cost of the home, and meet other requirements."
is your position that if the taxpayer fail the Part I rules, it's okay, just deal with the Part II rules? if so, where is that in the publication?
The reason why I believe both the IRS example and the Example 4 from the link are not deductible ANYWHERE, is because they fail the Part I rules so the Part II rules are not germane.
In the original ask of this thread the taxpayer asked if he could use the proceeds of the HELOC to invest in the LLC and deduct the interest. Does he pass the Part I rules? NO!!! (because of the font in red above). That is the end of the story. It's not deductible ANYWHERE.
Where does it say that if you can't deduct it on Schedule A (Part I failure) you are welcome to deduct it elsewhere? How do you otherwise logically explain the two examples that are not deductible ANYWHERE?
I much appreciate it!
if you think my logic is flawed, please let me know and where it is flawed.
@NCperson I really have neither the time nor inclination to engage with you further on this subject. If you refuse to accept the fact that the tracing rules are rather well established and the language in the Reg itself, I sincerely doubt that there is much more that can be written that would persuade you otherwise.
I accept that tracing rules are covered in the regulations, but I do not accept they apply to the situations raised. And I have two examples provided by experts indicating they do not apply, One of those experts is provided by the IRS itself (and no one has stated that the IRS is just wrong)
Unfortunate that others that have responded to this thread are unable to provide supportable evidence
so let's end the thread
sorry - I just found this link for others that may read this thread..... it clearly states that the tracing rules do NOT work for residential real estate interest as a result of the 2018 tax law changes.
https://roundtablewealth.com/resources/mortgage-interest-tracing-rules/
The Regulations under Internal Revenue Code (“IRC”) Section 1.163-8T define the method for allocating interest in order to apply the appropriate deduction limitations for passive activity interest, investment interest and personal interest and are commonly referred to as the “interest tracing rules.” These rules do not apply to the deduction for qualified residence interest.
The qualified residence interest rules as outlined above define the security interest (the qualified residence) and use of proceeds rules in order to determine the appropriate deduction
(what the link states as 'as outlined above" are the Part I rules I quoted earlier in this thread.)
The following was copied and pasted directly from the link provided in the above post.
Even with the mortgage interest deduction substantially reduced and the elimination of home equity indebtedness under the TCJA, there may still be a way to obtain a deduction for the interest on the mortgage or home equity loan. If you were to take out a mortgage or a HELOC secured by your residence and used the proceeds for another purpose such as to fund trade or business operations or to purchase an investment asset, the interest could become deductible, subject to any limitations of that interest category.