Can I take the interest expense from a home equity loan against my primary residence and divide it amongst 4 Schedule E rental properties I own?

[cjklapp]

I used to take the home equity loan interest as a schedule A Itemized Deduction. Since that deduction goes away in 2018, I would like to take it as a Schedule E expense spread across my 4 rental properties (or any 1 of them). 

[cjklapp]

After consulting with my financial advisor, he said that an argument can be made for allocating HELOC interest among the rental properties and personal use amounts. The percentage for personal use would not be deducted. Accurate documentation would be needed to determine the cost values used for the 4 rental properties and for amount for personal use. He referred me to PUB525-Business Expenses; Chap 4 - Interest.

"In general, you allocate interest on a loan the same way you allocate the loan proceeds. You allocate loan proceeds by tracing disbursements to specific uses."

"Secured loan. The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan."

[Zbucklyo]

Well and good, but the HELOC is not secured by a business property; it is secured by a personal residence.  Publication 525 does not apply in this instance.

[Carl]

I get the impression that you're wanting me (as well as others in this forum) to tell you what you want to hear.
Did your financial advisor also tell you that if you are audited, you are 100% responsible for the results of said audit? The financial advisor may represent you in an audit, but they have absolutely no liability what-so-ever. You agreed to that in your written and signed agreement with said financial advisor. On top of that, I do not know of very many financial advisors who are CPAs and registered with the IRS as an Enrolled Agent. Most of the financial advisors I know of aren't licensed tax preparers, meaning they have no formal training in tax law anywhere near the depth an enrolled agent does, and that most CPA's do.
Now I myself am not an FA, CPA, or EA and most certainly do not claim to be a tax expert by any stretch of the imagination. But I can tell you this for a proven fact. When it comes to dealing with the IRS, if it's not in writing, then it doesn't matter how much you threated or scream. It just flat out did not occur.
Most likely, trying to claim a loan not secured by rental property, as being a valid deduction of mortgage interest against said rental property, will come back to bite you a few years down the road. Then the accumulated interest, fines and penalties on the back-taxes you will owe will give you reason to seek the services of another financial advisor.
Do note that money spent on rental property for things like repairs, maintenance and even property improvements is something that can be and should be claimed against the rental income. It doesn't matter where that money came from either. Be it from the rental income, your W-2 job, or even a home equity loan on your primary residence either.

[SweetieJean]

Well said!

[TaxGuyBill]

The "tracing rules" say that whatever the money is used for, that is where it should be deducted..  So if the money was used for the rental properties, yes, it is deductible on those portions of Schedule E.

[Carl]

But not as mortgage interest against the rentals. Instead, as a rental expense for what the money was spent on.

[daniel-j-sanford]

Does the Tracing rule still apply in 2018?  So a HELOC secured by primary resident that i draw from to buy a rental property - the HELOC interest can be written off as a rental expense on the Schedule E if the tracing rule still applies.

[Carl]

It is my understanding (though I personally haven't confirmed it) that the tracing rules will still apply for the 2018 tax year. I'm still waiting for the IRS to update things on their website, as they are quite a bit easier to comprehend and interpret than is the bill passed by congress.

[tksca5]

The original answer above is correct, you CAN DEDUCT HELOC INTEREST against your home or your rental property, business, or other investments.  The tracing rules apply.  All the comments above are wrong.  

Complete table 1 of Publication 936.  The resulting line 16 has the following instruction:  

"You can't deduct the amount of interest on line 16 as home mortgage interest. If you didn't use any of the proceeds of any mortgage included on line 12 of the worksheet for business, investment, or other deductible activities, then all the interest on line 16 is personal interest. Personal interest isn't deductible."

So you can't deduct it as home mortgage interest.  But it clearly distinguishes business, investment, or other deductible activities (aka rental properties) from personal interest.  And it says only "personal interest is not deductible."  It doesn't prohibit business, investment, or other deductible activities from being deducted.

Table 2 even tells your which forms to carry the interest to for the appropriate deduction.  Keep in mind that this publication is titled "Home Mortgage Interest Deduction."  So if this form is specifically directing you to carry 1098 interest to other schedules for deduction, clearly the IRS is saying it is deductible.

[Anonymous]

@Carl  - a year ago you seem to hold that HELOC interest on primary reported on 1098 is deductible to the extent it was used to fund rental income expenses (such as purchase or improvements).

 "But not as mortgage interest against the rentals. Instead, as a rental expense for what the money was spent on."

Do you still agree with this?

How would you then allocate the funds if "not as mortgage interest".  In my case, some of the funds were use at closing on purchasing the house, and some on improvements to get it ready to rent.  FWIW, my property was also a like-kind exchange.

Thanks, and dissenting opinions welcome.  Is this still a contentious issue.  I am having trouble resolving it for myself.

[TaxGuyBill]

It is treated as deductible interest, and mortgage interest is perfectly fine.

[Carl]

The tax laws concerning HELOCS and the interest on same, have changed quite dramatically for 2018, from what they were in 2017. The deductibility of interest on a HELOC, depends on what the money was used for. Basically, if the money was used to "buy, build or improve" the property that secures the loan, then the interest is deductible. There is a "bit" of a twist too.
If you took out a HELOC on your primary residence, and used the money on your rental property to improve it, then the interest is deductible on the SCH E, line 12. On the reverse, if you took out a HELOC on your rental property and used the money to "buy, build or improve" your main residence, then the interest is reported on SCH A as an itemized deduction subject to the total of all SCH A itemized deductions exceeding your standard deduction.

[Anonymous]

Thanks @Carl and @TaxGuyBill and @tksca5  but I am still confused.

In December 2017 I purchased a new rental property as part of a "like-kind-exchange" of an old rental property (which I owned free & clear).  I also took out a HELOC secured against my primary residence, which funds were used to:

  (a) purchase the new rental property (as it was a more expensive new property)
  (b) conduct repairs on the new rental property to ready it for the rental market

Do you agree with my understanding how to apply your guidance provided above:

 (i)  The amounts spent on (b) are deductible as repairs.
 (ii)  The amounts spent on (a) will go toward the basis in the property, and will if effect be deductible via depreciation
 (iii) The HELOC interest on these amounts are deductible on schedule E line 12 for the new rental.

@Carl - the "twist" you mention specifically advises that interest on HELOC secured by primary is deductible if the funds were used to improve the rental; it does not mention if used to _purchase_.  This is part of the clarity I seek.

Thanks both of you for taking the time to educate...

~Malcolm

[TaxGuyBill]

Yes to all three points.