Is interest deductible for HELOC (secured by primary residence) to build physically detached building on same property.Max timeframe from building to taking out HELOC?Thx

[rroop1]

Question is regarding if the structure being physically detached impacts ability to deduct interest. IRS pub seems to address improvements attached to home. Also wondering re: max timeframe to take out loan before/after building project as not addressed in IRS publication. Thanks.

[Bsch4477]

Doesn’t matter if detached as loyal it creates significant value to your property. 

[Mike9241]

the IRS said that despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labelled. The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.

1) before construction begins, the loan does not qualify as acquisition debt and interest incurred during that period is personal interest. 

2) The construction must not take more than 24 months. after that its personal interest 

3) since the law includes improvements, there's no reason why a detached structure would not qualify. for examples an outside swimming pool or detached garage or shed.

4) loan proceeds must be directly traceable to construction

[Opus 17]

The TCJA didn't change the rules on deducting HELOC interest, it only lowered the total debt threshold from $! million to $750,000.  The other rules (must be to buy, build, or substantially remodel the home) were in place before 2018, as best I  remember. 

I think you need to talk to a tax professional.  There are some interesting points and I don't know how they work together. 

1. The IRS says that for divided use of a home, you can only deduct part of the mortgage for the part of the property that is used for "residential living."

2. A home does not have to be a house, it can be anything with sleeping, cooking and toilet facilities.

3. The loan must be secured by the home.  For a houseboat or camper, the loan would be a title loan secured by the boat or camper.  But for a house, mortgages are not secured by the house itself, they are secured by the real property (land) on which the house is built. 

So there is a question, I think, about whether or not improvements to the land count as improvements to the home.  The divided use rule would mean that if you were building an outbuilding to use for work, and not for "residential living", it would not qualify. What about a mother-in-law apartment?  It's not part of your home if you plan to rent it to strangers, but what if you allow an elderly parent to live there for free as part of your family?  How about a detached garage for your personal car?  I have a hard time picturing that a garage would qualify if it was attached to the house by a breezeway but would not qualify if it was detached. 

So my first question would be, what is the detached building actually to be used for?

My second question would be, is the building a "substantial improvement?"  The publications do not define "substantial" but elsewhere I have seen a suggestion of 10% or more of the home's value.  Is building a garden shed for $3000 on a $300,000 house really a substantial improvement?  What about a $20,000 garage or a $50,000 studio apartment for an elderly parent?

Bottom line, I don't know, so I suggest you ask your own professional, who will represent you if audited.

Regarding timing, and assuming the interest qualifies for other reasons, 

a. the loan qualifies if you take out the loan before the start of construction, as long as you complete construction within 2 years

b. the loan qualifies if you take out the loan after construction is finished, as long as you take out the loan within 90 days, and you can only look back 24 months.

c. for loans taken out during construction, you can count amounts spent after the loan was taken out, plus amounts spent up to 24 months before the date of the loan. 

[rroop1]

Thank you so much for the very thoughtful reply.  I agree there are a lot of questions that arise from all of this.  In my particular case the detached building is a shop that will cost 200-300k with value of original property at about 1 million.  It would be used to store RV’s and a boat.  So I would say it improves the value considerably but not used for a residential living space. 

[rroop1]

Thanks!

[Mike9241]

this is from IRS pub 936 - home mortgage interest

Divided use of your home. The only part of your home that is considered a qualified home is the part you use for residential living. If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that isn't.

[Opus 17]

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@rroop1 wrote:

Thank you so much for the very thoughtful reply.  I agree there are a lot of questions that arise from all of this.  In my particular case the detached building is a shop that will cost 200-300k with value of original property at about 1 million.  It would be used to store RV’s and a boat.  So I would say it improves the value considerably but not used for a residential living space. 

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I think you are thinking too narrowly.  "Residential living" doesn't necessarily mean your bedroom and kitchen only.   A garage is part of your home, whether it is attached or detached, and it counts for the mortgage interest deduction, even though you don't "live" in the garage.  Parking your car or boat in the garage does not disqualify you from claiming the mortgage interest deduction.  However, declaring the garage as a "home office" (business use of the home -- such as you are a self-employed auto mechanic, or you have woodworking tools and make projects to sell on Etsy) is what makes it not used for residential living.

If this workshop and garage for boats and RVs is still used for personal use (the RV you take family trips with, etc.) then I think it would still qualify as part of your residence.  (If a detached garage for your daily driver counts, why not a larger detached structure for larger vehicles as long as they are personal use and not business use.)

The other factors still need to be considered, though.