Use HELOC from my primary house to buy a commercial rental property. Based on the new 2018 tax law could i deduct the HELOC interest as a business expense on schedule E?

[PaulaM]

No, the interest is deductible on the personal side under deductions and credits. To deduct mortgage interest on schedule E, the loan must be secured by the rental property, not your primary home.

[daniel-j-sanford]

Are you sure PaulaM? I think the debt tracing rules come into play. Interest is deductible where funds are utilized. So in this case interest on the HELOC (secured by primary resident) that was used to buy investment property could be written off as an expense on the Schedule E? Was this rule changed for 2018?

[PaulaM]

Maybe. See this link.
<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/3457552-use-heloc-from-my-primary-house-to-buy-a-rental-property-s...>

[TaxGuyBill]

Yes, the "tracing rules" still apply, and the mortgage interest can be deducted on Schedule E.

[SweetieJean]

What about this TIP?

"If the property that secures the loan is
your home, you generally do not allocate
the loan proceeds or the related
interest. The interest is usually deductible as
qualified home mortgage interest, regardless of
how the loan proceeds are used. For more information,
see Pub. 936."

<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p535.pdf">https://www.irs.gov/pub/irs-pdf/p535.pdf</a> at p. 12

[TaxGuyBill]

@SweetieJean   By default, it is Home Equity Debt (which is not deductible for 2018).  There is an "election" to make it not Home Equity Debt and to 'trace' the amount for what it is used for.  That "election" is made by just entering the deduction for what it was used for (such as a rental).  See §1.163-10T(o) for the legal gibberish.

[NCperson]

but a close look at the legal gibberish at that tax reg specifically carve out residential mortgage interest, i.e. the tracing rules do not apply. 

look at the Part I rules in publication 936. unless the secured debt is used to purchase or improve THAT property, it's NOT deductible.  for example, you can't borrow money against your primary home and use it to purchase a 2nd home and expect to deduct the interest. 

[AmeliesUncle]

Tracing rules certainly DO apply.

The requirement for the loan securing the home is for when you claim it as your personal mortgage interest on Schedule A.  For business interest (including rentals) there is NO requirement that the loan is secured by the home.

[DW63]

Does anyone know for certain that investors have done exactly this and submitted their taxes for 2019 without any blow back by the IRS. Or is it too early to tell? Kills me to be sitting on so much equity and not having it earn anything.

[ThomasM125]

The main requirement for an expense to be deductible in a business is that the expense be ordinary and necessary. Clearly the interest expense is ordinary and necessary as it relates to the business. It does not matter where the money came from, the funds are needed in the business and you have to pay interest to make the funds available. So, the interest is deductible.

[USAJEFF]

Do I understand correctly then that if the funds from a HELOC, secured by my personal residence are used to finance a separate rental property, then I could deduct the HELOC interest expense on my Schedule E as a business expense for that rental property?    

[AmeliesUncle]

@USAJEFF   Yes.