HELOC Interest Deduction Mixing Personal & Home Improvement

[CUPianoman]

I'm having a hard time getting a straight answer and hopefully this community can help.  I opened a HELOC and used $14K of my HELOC for solar panels.  The interest on that is tax deductible from what I understand.  Now let's say I take out another $5000 in the same HELOC for non-home improvement things (paying down high interest debt, etc.).  Now I'll be mixing a home improvement project with a non-home improvement project in my HELOC.  How do you calculate the interest that's tax deductible?

Or should I open 2 HELOCs--one for home improvement and one for not?

[Critter]

2 HELOC accounts would make things easier ... otherwise revive your third grade math skills you thought you would never need/use  and do some prorating. 

14 + 5 = 19   

14/19 =  74%   home improvement

  5/19 = 26%     personal use

 So if the Annual interest paid is say  $1000    the ratio is  :  

$740 to deductible  home improvement  and   

$260 to non deductible  personal. 

[DanielV01 · Accepted solution]

It depends.  If you open a separate HELOC for the non-deductible interest, you may find that a more effective way to track the separate interest.  Otherwise, it may not be so easy.  You have already made several payments this year, which have been all deductible interest.  Any remaining payments this year would be split as Critter suggests.

[CUPianoman]

Thanks!  As I pay this down, do I continue to hold that proportion? Doesn't that change over time?

[Critter · Accepted solution]

If it is one loan the proration holds steady.

[CUPianoman]

I may be overcomplicating it, but should I may two amortization tables--one for the tax deductible part and one for the non-tax deductible part?  The prorating doesn't make sense to me because let's say i take $10,000 for a home reno and start paying that down and then in 3 years I take $5000 out for a vacation, for example, it's hard to prorate that, right?

[Critter]

You are diving too deep into the pool... go back to third grade ... if this was all in one HELOC ...
10K - 2K payoff to date = 8K
new 5K loan + 8K = 13K
8/13 = 61.5%
5/13 = 38.5%
Follow last answer to complete this math problem.

[CUPianoman]

Thanks! It really is that simple.  I over complicate things. Thanks for the clarification 

[Anonymous]

the IRS has reg.  1.163-8T and 10T that basically say you trace the use of loan proceeds to initially determine if interest may be deductible.  Then  there are other rules that determine if the interest is fact deductible.

Generally interest on HELOC is no longer deductible (as mortgage interest)  for years after 2018 EXCEPT when its used to buy, build or substantially improve the taxpayer's home that secures the loan..  if it does, the loan becomes what the IRS calls acquisition indebtedness.  Then as long as acquisition indebtedness doesn't exceed $750,000 (1/2 that if MFS) the interest is deductible. 

so if you had a $750,000 mortgage on your home before the HELOC, the interest on the HELOC would not be deductible

if you were to refinance the mortgage/ heloc there are other rules that would apply to determine deductibility.