Deductibility of interest if mortgage loan and home equity line are combined in a new mortgage

[mpsingh08]

I used a home equity line of credit (HELC) on my personal residence to buy another investment property. I understand that I cannot deduct the interest on the HELC. If I were to combine the existing mortgage and HELC in a new mortgage loan (with no cash out) will I be allowed to deduct the interest on the new mortgage if the total mortgage value remians under $750,000?

[Anonymous · Accepted solution]

Interest on home equity debt used to buy, build an addition to. or substantially improve an existing home is treated as acquisition indebtedness and therefore, the interest is generally deductible.  However, a HELOC on the main home used to buy other real property is not deductible.  

when you refi. the amount that is considered acquisition debt can not exceed the principal outstanding on the loan immediately before the refi.  since the HELOC would not be acquisition debt the max refi would be the balance on the mortgage. 

[AmeliesUncle]

So PART of the interest on the new mortgage would be deductible.

If 2/3 of the loan amount was refinancing the loan that bought your home and 1/3 of the loan amount was refinancing the HELOC for the investment property, then 2/3 of the interest will be deductible as personal mortgage interest and 1/3 would be towards the investment property.

However, as the loan gets paid down it gets more complicated than that.  I'm not sure if the program assists you with that or not.