Can I use interest from home equity loan on a schedule E if 100% of the funds went to purchasing a 2nd home?

2 Responses to Can I use interest from home equity loan on a schedule E if 100% of the funds went to purchasing a 2nd home?

1. v b says:

   January 18, 2010 at 5:37 am

   VAN

   How will the investment property be used? If you aren’t renting it out, you can’t deduct the interest there.
2. AngeloElectro says:

   January 21, 2010 at 9:47 am

   CALEB

   You can use the money from a home equity loan to purchase rental property. The interest would be deductible on Schedule E, line 18, as of the date the property was placed in service and available to rent. (Some people might enter the amount on line 12).

   The money has to be easily traceable, so it’s best to deposit the proceeds of the home equity loan into a checking account that is only used for your rental property. (If there is other money in this account, check Pub 535 for rules as to which funds are deemed to be spent first)

   Before the “Placed in service/Available for rent” date, the interest on the loan used to purchase the property would be deducted on Schedule A, if the property qualified as a second home, and if other restrictions were met.

   You can use proceeds of the home equity loan to complete repairs. If you deposit the proceeds into a checking account, you have to allocate the interest between property held for investment, and rental property interest. If you borrow $2,000 for repairs, and spend $1200 for painting in the first month, you can only deduct the interest, on Schedule E, as repairs actually paid. You can deduct the interest on the remaining $800 starting when that money is spent on repairs. Otherwise, the $800 sitting in the bank account is treated as Investment Interest Expense.

   To help you in the event of an audit, you can write in “Interest on repairs” on line 18, and list the amount of interest allocated there.

   For repairs and other expenses, some people would rather use a home equity line of credit instead of the proceeds of a home equity loan. The line of credit makes it easier to allocate the deductible interest. The line of credit usually has a monthly statement that itemizes, and lists your purchases by date.

   If you can get a $50,000-$60,000 line of credit, then maybe you would rather use that to purchase your property. Usually, the closing costs are similar perhaps even lower than the home equity loan.

   Just so you know, credit card interest is also deductible on Schedule E, as long as each purchase is for your rental property, and not for personal use.

   Good Luck