HELOC Interest - Land Under Construction

[Sunnywinds]

Hi, 

• I'm curious if the interest on a HELOC can be deducted if that land goes under construction for a home that will become the primary residence once complete? I understand that before construction you can't deduct interest, but the way I read the rules it seems like interest could be deducted as soon as the land is improved (construction begins). Thanks!

[JotikaT2]

It depends.

If you are using the proceeds from the HELOC to build a new home that you will reside in within 24 months and if the loan is taken out on the home that is being built, then yes, you can deduct the interest on your taxes on Schedule A if you are able to itemize your deductions.  

If the loan was taken out as collateral on another home, then you would not be able to deduct the interest for the construction of the new home.

Please see IRS Publication 936  and can I deduct interest on a home equity loan or a HELOC for more details.

[Opus 17 · Accepted solution]

You are not clear on which home will secure the equity.

If you borrow from house A to build house B, the interest is never deductible, before, during or after construction.  That's because, to be deductible, the interest must be secured by the home that is being purchased or built.

If, after completing house B, you get a mortgage on house B and use it to pay off the HELOC on house A, the new loan is a deductible mortgage with the following conditions:

A. The loan is only deductible if you take out the new loan before completing construction or within 90 days after completing construction, AND

B. You can only deduct the percentage of the loan used to pay costs incurred up to 24 months before the loan was taken out.  If construction took more than 24 months, you can only deduct part of the interest. 

If you get a construction loan for house B that is secured by that property, the interest is deductible from day 1, as long as you complete construction within 2 years and convert the construction loan to a regular mortgage.  (If you fail to complete construction within 2 years, you may have to file amended returns to remove prior interest deductions.)