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Use of new HELOC on principal residence to finance 2019 purchase of rental property

  • 1.  Use of new HELOC on principal residence to finance 2019 purchase of rental property

    Posted 02-13-2019 17:04
    Hello All!

    I'm not clear on the interplay between 1) P.L. 115-97 Sec. 11043 (LIMITATION ON DEDUCTION FOR QUALIFIED RESIDENCE INTEREST) which states that after 2017, home equity indebtedness interest is not deductible, and 2) IRS Pub 535 Business Expenses, page 13, which discusses the old tracing rules to determine what category of interest expense is being incurred based on the use of the loan proceeds (portfolio, personal, investment, passive trade or business, etc.).

    My questions: if a taxpayer uses 100% of a HELOC loan secured by his primary residence to pay, in part, for the acquisition of a rental property (a passive activity), can the HELOC interest be deducted on the Schedule E rental activity?  

    I'm was inclined to think that the tracing rules supercede the loss of the deduction for HELOC interest under the new law thus making the HELOC mortgage interest deductible, but IRS Pub 535 "Interest" section (page 13) states "Caution: P.L. 115-97 sec.011043 limited the deduction for mortgage interest paid on home equity loans and line of credit." and then refers to Pub 936 (Home Mortgage Interest Deduction) where I didn't see anything helpful.   

    Does anyone have an authoritative cite to support the 2019 deduction of HELOC mortgage interest where the proceeds are used to acquire a rental property?

    Thanks, and wishing you all a good season.

    Steve

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    Steven T. Rosenberg, CPA  
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  • 2.  RE: Use of new HELOC on principal residence to finance 2019 purchase of rental property

    Posted 02-13-2019 21:58

    Steven

     

    IN My humble opinion , Interest tracing rules would apply, and you get the deduction. The question about home interest refers to a " Interest on home equity loans and lines of credit only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home ", which clearly this is not your case,  So under today's law it would not qualify as home mtge interest in any way.  Therefore it is not anything except your debt.

     

    I know you asked for citations, these may be on point.

     

    If you borrow money to buy a property, it would seem that it makes no difference where you got it. Tracing rules  §1.163-8T

    http://www.gpo.gov/fdsys/pkg/CFR-2012-title26-vol2/pdf/CFR-2012-title26-vol2-sec1-163-8T.pdf       this reg says allocate in the manner the expenditure has been made.

     

    An esteemed scholar wrote this.

    https://cbmslaw.com/2003/05/31/tracing-rules-tracking-the-deductibility-of-interest/

    I reference you to the last paragraph

     

     

     

    i hope this helps.

     

     

    Abby

     

     

     

     






  • 3.  RE: Use of new HELOC on principal residence to finance 2019 purchase of rental property

    Posted 02-14-2019 08:42
    If you're going to use the tracing rules, suggest telling taxpayer to put loan proceeds in a separate account from other funds (business income, paychecks, etc). it often takes a while to get around to spending the loan money, and IRS can argue that you used loan proceeds for personal expenses if other money is going in and out of co-mingled funds.





  • 4.  RE: Use of new HELOC on principal residence to finance 2019 purchase of rental property

    Posted 02-15-2019 14:50
    Thank you, everyone, who took the time to respond during this very busy season.
    Much appreciated!

    Steve

    ------------------------------
    Steven Rosenberg
    CPA
    STEVEN T. ROSENBERG, CPA
    Hauppauge NY
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