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Level 1

Use HELOC from my primary house to buy a rental property. Shall I deduct the HELOC interest as primary home mortgage interest or as expense for the rental property?

 
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Level 1

Use HELOC from my primary house to buy a rental property. Shall I deduct the HELOC interest as primary home mortgage interest or as expense for the rental property?

When you borrow funds, the funds and related interest are traced to activities that utilized the funds  within 30 days of the borrowing. In your case, all your borrowings on the HELOC were used to acquire   rental property. Therefore, the interest paid on the debt could be considered passive activity interest  or alternatively you could treat it as home mortgage interest within the $100,000 limitation or a  combination thereof.

If treated as passive activity debt, the interest is deductible against the rental income produced by the acquired property. The limitation of $100,000 on home equity debt does not apply, as the debt incurred for personal purposes.

If you use part of the HELOC for personal purposes, that interest would be allocated to home mortgage interest on Schedule A within the $100,000 limitation.

Home Equity Debt  

http://www.irs.gov/publications/p936/ar02.html#en_US_2016_publink1000230008 

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Level 1

Use HELOC from my primary house to buy a rental property. Shall I deduct the HELOC interest as primary home mortgage interest or as expense for the rental property?

When you borrow funds, the funds and related interest are traced to activities that utilized the funds  within 30 days of the borrowing. In your case, all your borrowings on the HELOC were used to acquire   rental property. Therefore, the interest paid on the debt could be considered passive activity interest  or alternatively you could treat it as home mortgage interest within the $100,000 limitation or a  combination thereof.

If treated as passive activity debt, the interest is deductible against the rental income produced by the acquired property. The limitation of $100,000 on home equity debt does not apply, as the debt incurred for personal purposes.

If you use part of the HELOC for personal purposes, that interest would be allocated to home mortgage interest on Schedule A within the $100,000 limitation.

Home Equity Debt  

http://www.irs.gov/publications/p936/ar02.html#en_US_2016_publink1000230008 

View solution in original post

Level 1

Use HELOC from my primary house to buy a rental property. Shall I deduct the HELOC interest as primary home mortgage interest or as expense for the rental property?

Does anyone know how this will play out with the new tax laws?
Level 1

Use HELOC from my primary house to buy a rental property. Shall I deduct the HELOC interest as primary home mortgage interest or as expense for the rental property?

bumping Dan126's comment
Level 1

Use HELOC from my primary house to buy a rental property. Shall I deduct the HELOC interest as primary home mortgage interest or as expense for the rental property?

if you are not filing a Schedule A you probably would want to deduct against rental income. Anyone know where to enter that in Turbo Tax?
Level 7

Use HELOC from my primary house to buy a rental property. Shall I deduct the HELOC interest as primary home mortgage interest or as expense for the rental property?

You wrote:  In your case, all your borrowings on the HELOC were used to acquire   rental property. Therefore, the interest paid on the debt could be considered passive activity interest …  If treated as passive activity debt, the interest is deductible against the rental income produced by the acquired property. 

 

I clicked on your provided link and researched this matter in the IRS Publication 936, “Home Mortgage Interest Deduction.”  On the front cover and in numerous other places in the official IRS publication it clearly states any HELOC interest expense paid on items not to “buy, build, or substantially improve your home” meaning your primary residence – this interest is no longer deductible for tax years 2018 and forward.

 

As a CPA, I respectfully disagree to your advice on deducting HELOC interest expense against rental income (or deducting anywhere else on a return) if the purpose of the HELOC debt was not for the “buying, building, or improving” of your primary residence.

 

Level 20

Use HELOC from my primary house to buy a rental property. Shall I deduct the HELOC interest as primary home mortgage interest or as expense for the rental property?

The interest should go on the Sch E due to the tracing rules... the HELOC was used to buy the rental which did make it for the acquisition of the rental property.  Be prepared to support that assertion in case of an audit since the 1098 has your personal residence listed on it and not the rental.

Level 20

Use HELOC from my primary house to buy a rental property. Shall I deduct the HELOC interest as primary home mortgage interest or as expense for the rental property?

Per @TaxGuyBill   in this thread :  https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/use-heloc-from-my-pri...

 

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.