HELOC Fate

[Edsel]

I have a client with a half-dozen rental properties.  Proceeds from HELOCs were used to fund many of these.  I have been deducting the interest on these HELOCs against rental income, and believe it has been proper to do so.

I'm told HELOCs are not treated kindly with the new tax law.  However, do the new restrictions apply to HELOCs used for businesses?  What if a couple of the HELOCs were used for business but were collateralized with the personal residence??

Please address the question on its face value.  It is easy for one to let the imagination run wild and wonder whether it was wise to borrow this much money and how this could turn into a horror story.  Keep in mind that in booming Nashville, a home may be worth 3X to 4X of its value 15 years ago.

 

 

 

[BulldogTom]

For an individual, you are correct, the HELOC interest will not be deductible.   I am pretty sure the rental activities will be able to deduct the HELOC Interest, provided you have good tracing of the funds to the rental activity, but read up on the new business limitations on interest.   I am still working through this issue as well, so we can learn together.   I think there is a 30% limitation on the amount of interest a business can deduct for interest expense.   I think that if you are calling a rental a "trade or business" to be able to deduct the HELOC interest, then you have to follow this rule for the rental activity.  

That would suck for your client if they are not generating a profit (before the application of the interest deduction).  

I think you get to add back depreciation as well before applying the 30% limitation.

This is new stuff, so don't take my word for it.   But please keep posting what you are seeing on this issue.

Tom
Modesto, CA

[Richcpaman]

The 30% Interest Deduction limitation is for businesses with more that 25 million in sales, so I don't think that will be a problem, and anyway, there is a real estate exemption for that as well.

File your interest tracing attachments this year....  Problem Solved

Rich

[Roberts]

As long as it's for business and you've documented that - I think the interest is 100% deductible for the business. I lot of people use home equity loans to finance rental property just for the ease of getting a loan. When I did a cash out refinance to buy a rental, the mortgage lender said he would need a letter from me explaining for what I was using it. I told him I was buying a rental property and he freaked out explaining I shouldn't say that - write that I'm giving it to my nephew to pay for his college education and I'll get the money immediately. If I say it's for a business (rental property) I'll spend the next month justifying a business plan.