Error in 2023 HELOC Interest both Online and Windows Desktop versions

[gauldsg04]

I have spent hours on the phone and in chat sessions with TurboTax Tax Advisors and Turbo Tax Product experts and still no solution.  I took out a HELOC in 2023 and use ALL of the proceeds to buy and modify a NEW house that will be ready to move into in April 2024.  Both the Online and Desktop versions claim the interest paid to the HELOC is fully deductible but everything I can find (IRS website and other tax websites, even Turbro Tax website, says this interest can not be deducted).  I was using the online version but after several hours on the phone with a tax expert, she gave me a code to download the desktop version saying I can work around the problem using the desktop version.  The desktop version has the same problem and I have not found a way to work around it.  I have 4 sources of mortgage interest.  Three of them can be written off but not the HELO.  On Schedule A, it shows the total of all 4 sources.  It does correctly check the box that says not all of the proceeds were used to buy or modify the home secured by the loan, but it still deducts the interest.  I will be calling again but wanted to post this questions here as well.  Line 8 is correctly checked.  Line 8 a incorrectly show the sum of all of the interest (it should not include the HELOC interest).  Line 8 b correctly shows the interest that was not reported on a 1098 (less than $600 so a 1098 was not required).

How do I work around this issue? 

[PatriciaV]

If you used 100% of the HELOC proceeds for the construction of a new home, all the related mortgage interest is deductible. Why have you checked the box for "No, I used some or all of this loan on a different home or on something other than a home"?

According to IRS FAQ Real Estate:
"You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it's ready for occupancy. The 24-month period can start any time on or after the day construction begins. As a qualified home, the interest paid may qualify as deductible mortgage interest, with certain limitations."

   Note: the "certain limitations" refers to the mortgage interest limitation rules.

[gauldsg04]

The rule also says, the loan must be secured by the SAME property that the proceeds are used to construct.  The HELOC is secured by home A and the proceeds were used to buy and substantially modify Home B.  So, with the rule above, the answer would need to be no since the proceeds were not used to buy and modify the home that was used to secure the loan.  So, unless I am missing something, and every tax expert I have asked and website I have checked all agree with my understanding, the interest is not tax deducible.  The Tax expert at Turbo Tax I spoke with today told me that since I did not use any proceeds on the home used to secure the loan, I can simply act as if I never had the loan in the first place (do not include its 1098 in my filing).

[DMarkM1]

You are absolutely correct.  Since none of the HELOC funds were used to buy, build, improve the home that secured the loan, then you cannot deduct the interest so there is no reason for any mention on your tax return.  It is not income nor a deduction.  You already have reviewed this, but here is the Publication 936 reference extract. 

" Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. The loan must be secured by the taxpayer’s main home or second home (qualified residence), and meet other requirements. " 

[Opus 17]

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@gauldsg04 wrote:

The rule also says, the loan must be secured by the SAME property that the proceeds are used to construct.  The HELOC is secured by home A and the proceeds were used to buy and substantially modify Home B.  So, with the rule above, the answer would need to be no since the proceeds were not used to buy and modify the home that was used to secure the loan.  So, unless I am missing something, and every tax expert I have asked and website I have checked all agree with my understanding, the interest is not tax deducible.  The Tax expert at Turbo Tax I spoke with today told me that since I did not use any proceeds on the home used to secure the loan, I can simply act as if I never had the loan in the first place (do not include its 1098 in my filing).

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You need to answer that the loan was used for "something else."  Do not answer that it was used to buy or build your main home (since it was not secured by the home that was built.)

The support rep was also correct that, if you know for sure that the interest is not deductible, you can simply ignore it and not enter it on your return.  

[gauldsg04]

I went the route of simply ignoring that it exists.  Selecting "something else" in Turbo Tax STILL resulted in the interest being deducted.  The only way I could get the interest removed from Schedule A was to delete that 1098 and completely ignore it.

[ksunberg]

I think it's true that some states allow the deduction of non-acquisition interest.  Simply omitting the 1098 is not a useful solution in that case.