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HELOC on primary residence before converting to a rental

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Level 2

A client purchased a primary residence on 12/17/2012. They took out a HELOC on 09/01/2017.  They moved and kept this house as a rental property. It was available to rent 6/1/2018.  How is the 1098 handled for this? Is it Sch A because of the origination date, or is it Sch E since it was a rental property for the entire current tax year? Or is it some other option?

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8 Replies 8
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Level 10

How was the HELOC money spent?

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Level 2

Sorry, forgot to include that. It was spent on the house. 

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Level 12

If it was spent on something that is now used for rental use, it is a rental deduction.

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Level 2

So, when it was spent is irrelevant? It is based on purpose of the property when the 1098 interest is paid?

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Level 10

Whatever loan proceeds you can trace to "buy, build or substantially improve" the property follow to the rental, so interest would be deducted on Sch E.

If, instead, proceeds were used to buy a car, pay off credit card debts, etc. it would be non-deductible personal interest.

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Level 2

I just got more information from the client. They took out the Heloc on their home, started renting that out and then they used the Heloc to renovate the second house the purchased.

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Level 10

@joefts wrote:

I just got more information from the client. They took out the Heloc on their home, started renting that out and then they used the Heloc to renovate the second house the purchased.


Is "second house" a personal residence?  If so, sounds like Heloc interest is non-deductible personal interest.  If, however, they would like to refinance it with a loan that's secured by the personal residence, then it qualifies as home acquisition debt deductible on Schedule A.

What a mess.  I have a couple clients like this, make sure you charge enough for your janitorial services!

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Level 2

Yes, the second house was a personal residence. So, they took out the HELOC on the first house in KY in a previous year, and paid all that back. Afterwards, they moved and kept the first house as a rental property. While in their second home in KY, they used funds (reported on their 2019 1098) for home renovations. They then ended up selling that home and moving out of state. Hope that clears some things up.

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