@Love2Bike wrote:
The purpose of using HELOC is to make money rather than spending it on a "home improvement" for instance. Is there any difference how I want to make money, wether buying a stock or loaning for a above HELOC interest rate to someone else? I made money on the transaction and my question is can I deduct the HELOC interest as expense from the income I made from that deal, in that case the loan?
There used to be a deduction under the category of "miscellaneous itemized deductions subject to the 2% rule" that could include, in some cases, money that you spend to make money. For example, if you paid a fee to an investment advisor, or had a membership in a stock market analysis web site. Those miscellaneous itemized deductions were eliminated for 2018-2025 by the tax reform law signed in 2017.
I don't know if using your HELOC to "make money" in general terms, would have even been allowed under the old rules, but since they are gone, I don't need to research it, and the answer is that in general, if you "use your HELOC to make money" you can't deduct the interest for tax years 2018-2025 and maybe longer.
The specific exception is investment interest on form 4952. If you borrow to buy an investment, the interest is deductible up to the proceeds of the investment. For example, if you borrowed money to buy gold, and you didn't sell it, the interest isn't deductible. But you can use form 4952 to keep track of the interest and carry it foreward to whenever you sold the gold. If you sell in 10 years for a $1000 profit, you can deduct up to $1000 of interest you paid over the years, if you had been keeping track. Or, you buy stock for $10,000 that pays $100 a year in dividends. You borrowed at 5% so you pay $500 per year in interest. You can deduct $100 of interest from the $100 dividends so the dividend is non-taxable, and you carry forward the other $400 of interest until you sell the stock, if you sell for a profit.
And the tracing rules must apply as I described.
I would consider an "investment" to be something you can buy on the open market--stocks, bonds, other securities, commodities, property, collectibles, etc. Whether loaning money to a friend or family member counts as an "investment" is something you would need to have reviewed by your own hired tax professional. Proving the difference between a gift, a loan, and an investment would require specific paperwork, most likely contracts and other documents.
Note that part of the answer is that you are not engaged in the business of lending. Suppose a small bank, ABC, Inc., borrows money from a big bank, XYZ Corp., at 3% interest, and loans it to borrowers at 6% interest. (This is, in fact, how many banks work.) ABC bank reports the interest it receives from customers as taxable income but they can deduct the interest they pay to their lending as a business expense. You can't do that because you aren't in the business of lending. You use the personal tax rules. The miscellaneous itemized deduction is eliminated until 2026, so the only way to deduct loan interest is for you purchase investments and report and track the interest on form 4952 by following the tracing rules.
