How do I deduct HELOC interest from rental property?

[tamtrinh]

@Critter @AmeliesUncle 

Interest on Home Equity Loans Often Still Deductible Under New Law

Please search it from IRS website the above sentence 

Cited:

The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

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.

[anthonywright13]

How does someone buy a home with a heloc that is associated with that home? You can’t buy a home from yourself. Can you use a heloc on an investment property to buy your new primary? Would this be deductible? 

[potsticker]

Hi John60, were you able to get your question answered? i have the same question.

[Carl]

I just finished perusing Pub 936. It's a bit more detailed than one might realize.

First, the home used to secure the refi or HELOC must be a qualified home. A qualified home is defined as:

includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleep-ing, cooking, and toilet facilities.

The two types of qualified homes are broken down as:
Main home.You can have only one main home at any one time. This is the home where you ordinarily live most of the time.

Second home.A second home is a home that you choose to treat as your second home.

Then a second home is further broken down and defined as:
Second home not rented out.If you have a second home that you don’t hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You don't have to use the home during the year.

Second home rented out.If you have a second home and rent it out part of the year, you must also use it as a home during the year for it to be a qualified home. You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you don't use the home long enough, it is considered rental property and not a second home.

So from what I see, if you refinanced your primary residence and used the cash out on a rental, if you did not actually use that rental as a home for 14 days or 10% of the time it was classified as a rental, (whichever is greater) then monies not used from the refi or HELOC taken out on the main home, to improve that main home do not qualify for an interest deduction anywhere on the tax return.

[FLORIDABOY1]

In 2020, I turned my second home into a full-time rental. I have a HELOC on my main home on which I pay interest. The HELOC debt was used 100 percent to restore the (now) rental. Can I deduct the HELOC interest I paid in 2020 (at least for the portion of the year it was rented)?

[Carl]

Can I deduct the HELOC interest I paid in 2020 (at least for the portion of the year it was rented)?

You can deduct a portion of it on SCH A for the period of time it was your primary residence, and a portion of it on SCH E for the period of time it was classified as a rental. Tracing rules still apply. This is covered in IRS Pub 535 Chapter 4 here Start at "Allocation of Interest" bottom of middle column.

[refugio56]

I got a HELOC at a 30 year fixed rate to pay off my high interest mortgage, is the interest from the HELCO Tax deductible?  

[DaveF1006]

@refugio56 Yes, the mortgage interest is tax deductible on your Heloc Loan if  you have used it  to upgrade/update the property that secures the loan. However, If you have used the proceeds for other purposes other than upgrading or updating the loan, you can only deduct the interest on the proceeds that was used to improve/upgrade the home.

Please read this Turbo Tax link, written by Carl for further information.

[taxmodern]

Ok there are a lot of confusing answers here that don't really apply to the original question.  

It doesn't matter what property secures a loan, it only matters how the loan money is used.  See the loan tracing rules explained in IRS publication 535 in the Allocation of Interest chapter.  If you have a HELOC, cash-out refi, etc. from your home or any property, you can use that money to buy/improve a rental property, and then the interest from that loan is deductible as an interest expense on the Schedule E for your rental property. 

The answers that talk about interest deductions for your home on Schedule A, Tax Cuts and Jobs Act, Pub 936 qualified home interest, etc. aren't applicable to the original question (but they might be answers to other questions people asked later in these posts).