HELOC Deductibility

Schedule E expenses should directly relate to the rental property itself.

If your HELOC was not used to buy, build or improve the house, or used for the rental property some other way, such as purchase of rental appliances, it should not be claimed on Sch E.

Thank you, Arthur.

Does this mean, for example, that if I take the rent money and spend it, and then write a check on the HELOC to pay the property taxes and maintenance, that the interest on the HELOC is deductible, but if I use the rent money to pay the expenses and borrow against the HELOC for other purposes, it's not?

The HELOC is very reasonably debt incurred for the purchase. I paid $180,000 for the condo, including $60,000 that I borrowed against my brokerage account, I immediately opened the HELOC and paid off the brokerage loan.

No, bad example, since the property taxes will be a deduction in themselves.

Which is why the "traceability rules" the rules describing how to trace the interest to the item used in your trade or business, were generated.

So what? Suppose I have a rental property which happens to be vacant. If I borrow from the HELOC to pay the real estate taxes, is the interest deductible?

Seth

OK, good point.

I'd say if the property is still a rental property -- up for rental even if vacant -- then any loan interest where the proceeds can be traced directly to allowable rental use is deductible.

Yes, there are issues, and yes, it matters what the money is used for. I believe you have been incorrectly deducting interest expense for your rental, based on your facts.

Your original acquisition debt (from the margin loan) when the property was your residence was not qualified home mortgage acquisition debt, since it was not secured by your home. You then paid off the entire acquisition debt, and took out a HELOC, which was eligible for the home equity debt deduction up to a loan balance of $100K. (but see comment further below).

When you converted to a rental, NONE of the HELOC interest on the existing balance was any longer deductible as either home mortgage interest or rental interest expense, since it was not acquisition debt for the rental.

Depending on what you mean by "immediately", there might be a way that the HELOC *could* be considered secured acquisition debt for the home/rental -- however every time you paid that HELOC balance down, you permanently reduced the portion considered to be acquisition debt.

You could deduct the interest for new money borrowed to pay rental expenses, but you are opening yourself up for some complicated allocation calculations and record-keeping per Reg. § 1.163?8T. You also have to carefully keep track of the ordering rules for debt repayment, to determine when you have actually paid back the rental-related debt and can thus no longer deduct the interest. This is because, as you state, you are using the HELOC as a "piggy bank" which I assume you means your balance routinely goes up and down.

Not to mention that borrowing money simply to get a tax deduction for the interest usually does not make much economic sense. Perhaps you have liquidity or cash flow issues that are prompting you to do this, but otherwise I don't see much benefit.

article,

I am not borrowing just to get the deduction. When I bought the condo, I put pretty much all my cash into it, and rather than replenishing my cash, I paid down the HELOC. Then I started seeing a woman in another city (see my other posts on my Canadian girlfriend, now my Canadian wife) and all my spare cash was going to Air Canada.

If I borrow on the HELOC to pay the property taxes and maintenance, does the interest on that amount become deductible?

I didn't deduct the interest on the margin loan, but it was just pocket change since I only owed it for about a week.

article,

On Schedule E for rental property? Yes, as stated by someone earlier in this thread.