I owned a home that had no mortgage but had a home equity line of
credit. I converted it to a rental property about two years ago. The
line of credit total amount is $100,000, of which at present only a
small amount is used.
Are there any issues of deductibility of the interest? I have been
claiming it as a rental expense on Schedule E. Does it matter what
the money was/is used for? Originally I paid cash for the home, but I
had to borrow about $60,000 as a margin loan against my investment
account, which I repaid once I opened the HELOC. Since then I have
paid down a lot of it, but I kind of use it as a piggy bank.
In article ,
Schedule E expenses should directly relate to the rental property
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
In article ,
No, bad example, since the property taxes will be a deduction
Which is why the "traceability rules" the rules describing
how to trace the interest to the item used in your trade or business,
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
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.
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.