Tax Guru – Ker$tetter Letter

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Interest On Home Equity Loans

Posted by taxguru on April 3, 2007

Q:

Subject: HELOC Tax Deductible?
 
Would the interest on the HELOC be tax deductible if I pull equity (about $47K) from my primary home and use that money to pay down my rental property or investment property?
 
Thank you,

A:

There are a number of possible ways in which the interest on that loan could be deductible on your tax returns. 

For example, if you haven’t already exceeded the $100,000 limit on equity debt, the new interest could be claimed on Schedule A as personal residence mortgage interest.  It would not be deductible for AMT purposes.

Under the interest tracing concept, interest on any loan proceeds put into your rental properties could be deducted on the rental Schedule E.  This could yield a better tax savings than using Schedule A because it could reduce your AGI, which triggers a lot of other tax savings items.

Under the same interest tracing concept, loan proceeds put into investment property would enable the interest on that portion of the loan to be claimed on Schedule A as Investment Interest, subject to its annual deductible limits.

Your personal professional tax advisor should be able to help you deduct the interest in the most efficient manner.

Good luck.

Kerry Kerstetter

 

 

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