topic Tax deductions on Home Equity Loan (HEL) to build primary residence in Deductions & credits

Tax deductions on Home Equity Loan (HEL) to build primary residence

Agustin10 — Mon, 24 Mar 2025 20:02:21 GMT

Hello, can I deduct mortgage interests (form 1098) from a Home Equity Loan we took on what used to be our primary/homestead/main residence (House A) and used ALL the funds to build a new house which we turned into our primary/main residence/homestead (House B) now? We built the new residence and moved into it in less than 8 months. This all happened in 2024 in Texas. I've read several versions on yes and no and thus asking for help and clarification.

Thank you,

Agustin

Re: Tax deductions on Home Equity Loan (HEL) to build primary residence

Opus 17 — Mon, 24 Mar 2025 20:07:36 GMT

No. To be a deductible mortgage, the loan must be (a) secured by the property and (b) used to buy, build or remodel the home.

Because the loan is secured to your original house A, but was used to build house B, it does not meet those tests.

And unfortunately, due to time rules in publication 936, you only have 90 days after house B is finished (gets its C/O) to take out a mortgage on house B for it to count as deductible acquisition cost.

https://www.irs.gov/publications/p936

Re: Tax deductions on Home Equity Loan (HEL) to build primary residence

Agustin10 — Mon, 24 Mar 2025 20:15:22 GMT

Thanks Opus, let me go the extra mile since that is clear. We did turn House A into short term rental (AirBandB and Verbo), can I expense the HEL mortgage interest as an expense since to do that I had to move out of House A?

Agustin

Re: Tax deductions on Home Equity Loan (HEL) to build primary residence

Opus 17 — Mon, 24 Mar 2025 20:23:57 GMT

@Agustin10 wrote:

Thanks Opus, let me go the extra mile since that is clear. We did turn House A into short term rental (AirBandB and Verbo), can I expense the HEL mortgage interest as an expense since to do that I had to move out of House A?

Agustin

Probably not. You run into something called the tracing rule. If you take out a loan from your rental property, it has to benefit the rental property to be a rental expense. (Trace the money to the expense.).

Usually this happens the other way. Suppose you borrow from house A to build house B, and house B is the rental. You can deduct the interest on house A as a house B rental expense, provided you can trace the dollars from one to the other. If you were to use the HELOC on house A for the rental house B, and also to remodel house A or take a vacation, you muddy the waters and make it much harder to support the expense using the tracing rule.

But in this case, the mortgage on A was used to build house B, and then A is the rental. So the interest is not deductible as home interest for A (was not used to build A), is not deductible as home interest on B (not secured by B) and not deductible as a rental expense on A (because the loan proceeds did not benefit A as a rental.)

Re: Tax deductions on Home Equity Loan (HEL) to build primary residence

Agustin10 — Mon, 24 Mar 2025 20:52:27 GMT

Understood Opus, do you see any other ways given this scenario?

Agustin