Home Equity Loan on Rental Property

[RightOn]

I understand home equity line interest is usually deductible up to $100,000 of the loan balance. But if you use home equity loan to buy a rental property, you may be able to deduct the full amount of the home equity line interest even if the loan amount is more than $100,000. But allocation has to be made between the amount claimed on Schedule A and Schedule E of the rental property.

For example, A taxpayer used $300,000 from his home credit line to buy a rental property. Total home equity interest paid in 2014 is $9,000.

He deducts $3,000 ($9,000 X $100,000 / $300,000) on Schedule A because it is the interest on $100,000 of home equity debt.

He can then deduct the remaining $6,000 of home equity interest on the Schedule E of the rental property.

Have I understood everything correctly?

[Roland Slugg]

I don't think so. You allocate interest on a loan the same way you allocate the loan proceeds. So if all the HE loan proceeds were used to purchase a rental property, all the interest is deductible on Schedule E, and none should go on Schedule A.

[Gretel]

I agree with Roland, and don't forget to make the 10-T election.

[Kram BergGold]

More Precise

You make the election on the first $100,000 borrowed. The loan amounts over $100k are automatically not deductible on Schedule A so those just have to be traceable.

[RightOn]

Thank you for all the replies.

I agree with Roland, and don't forget to make the 10-T election.

I have heard it is a 'silent' election which means that you are considered to have made the 10-T election if you choose to allocate all the interest to the Schedule E in the first year.

Is it correct?

[Roland Slugg]

... and don't forget to make the 10-T election.

Good point! That will preserve the $100,000 for a possible, additional home equity loan where the proceeds are used for personal purposes.

The 10-K election refers to the election under Regs 1.163-10T (specifically 1.163-10T(o)(5)).