HELOC interest on loan used to invest in LLC I work for

[mlongley]

I am thinking of using the proceeds from a HELOC to invest in an LLC I work for.  Would the interest paid on the HELOC be deductible?

[tagteam]

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.

See https://turbotax.intuit.com/tax-tips/investments-and-taxes/what-are-deductible-investment-interest-e...

[mlongley]

As I said, I work for the LLC.  I thought that meant it is NOT passive.  Is this a bad assumption?

[tagteam]

Are you a member of the LLC? Do you materially participate?

If you are investing in your own business, that is entirely different.

[DoninGA]

@tagteam 

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?

[tagteam]

@DoninGA 

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.

[DoninGA]

Thanks....Learned something new!!

[NCperson]

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

[NCperson]

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? 

[tagteam]

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

[NCperson]

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] , but no further reference is provided.  It does suggest that there are other rules to follow outside of this treasury regulation when dealing with qualified residential debt (of which a HELOC is one of them).

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 be deductible. 

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 

[NCperson]

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 

[DoninGA]

@NCperson 

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]

yes, thank you 

[tagteam]

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@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?

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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.