May I ask ...
For federal tax purposes, what is the proper way to account for a HELOC taken on a rental property where the HELOC proceeds were used solely to assist in the finance of the purchase of a primary residence.
Does the HELOC interest go in schedule E (rental interest expense)? Or does the HELOC interest go on schedule A (primary residence interest)?
It can't go on Schedule A because it is not qualified mortgage interest expense. The loan is not secured by your qualified home.
And it is not used for the rental property so it is not Sch E either.
The interest goes in neither place. It is not deductible for the reasons given by Alan and Art.
Oh my! I had to exercise the HELOC last year to close on the principal residence and I'm doing my 2009 taxes.
Would the rental property HELOC interest be deductible on schedule E if I refinance from a HELOC to a 30-year fixed mortgage?
Unfortunately, no - because you can't trace the loan proceeds to a deductible use. The best you can hope for is to have enough equity in your principal residence (some day) so you can get a HELOC there and use those proceeds to pay off the rental HELOC. But that would not be acquisition debt, and so the interest would not be deductible for AMT purposes.
I suppose one thing you might consider is seeing if the lender will take additional security for the same loan in your home as well as the other property. That could put you at additional risk if you ever default, however.
If I pay cash for a rental property, and later take out a loan less than the purchase price, is the interest on that loan not a rental expense that is deductible?
Only interest on the first $100,000.
Actually, I don't think so, unless the funds were plowed back into the rental, or if within 30 days of purchase of the property, so allocation rules can be applied.
Agree. Potentially the proceeds could be used to buy build or improve other rental properties and still be deductible against those activities.
-Mark Bole
That's a good suggestion, for interest deductibility purposes.
-Mark Bole
Sorry. I do not understand.
If I have a $600K loan on the principal residence from bank1 for a $1.5M home; and if I have a $500K HELOC on the rental property from bank2 for a $650K home ...
Q1: Which bank do I proffer the additional security to? Q2: What could I use as that additional security?
The second loan is from bank2, and it went to buy the principal residence. So that's who you want to give the other security to. You want them to have security in the principal residence for the loan.
The only additional security you can use is a 2nd mortgage on the principal residence.
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