Home Equity Loan on a primary residence to purchase a rental property

[txtax]

Taxpayer did a home equity loan (lender called it cash-out loan) on his primary residence to purchase a rental property in 2023. It was put in service as of November 23 and I just want confirmation that the title fees, points, lender's fees that he paid to take out the loan will be deductible or amortized since it was used to purchase a rental property.

[Lion]

Not as a primary residence mortgage, because it's secured by a house that is NOT your primary/secondary residence. If it qualifies, you can trace it to the rental property when placed in service. Someone here will give you cites. (I'm watching the eclipse.)

[txtax]

The loan is secured by the primary home. Taxpayer bought the rental property cash (money saved up plus the cash out loan). Totally enjoy the eclipse!

[Lion]

Said that backwards. Blaming it on sunspots! Loan is secured by the primary home, but wasn't used to buy, build, or renovate that primary home; so, you don't have a Sch A deduction. It was to buy the rental house, but isn't secured by the rental house; but if you can trace the income to the rental house, you could have a Sch E deduction. If you bought the rental property with cash, not traced from a loan, then you don't have any interest deduction for that cash. You do have depreciation associated with that Sch E.

[Maribeth]

In TaxSpeakers 2023 Individual Update class, Bob Jennings explains in depth the effect of TCJA on home equity loans. The Act repealed the deduction for home equity interest from 2018 through 2025. The only exception to this repeal is if the equity loan is used to buy/build/improve the taxpayer's home that secures the loan. For any other purpose, there is no interest deduction.

Unless you make the 10-T election. By making that election, you recharacterize it out of mortgage interest and can now use the tracing rules. (Tracing rules are used when debt is NOT secured by a home.)

The election is made under Reg 1.163-10T(o)(5) and avoids the home mortgage interest rules and reverts to the tracing rules. The election made in a particular year applies to the interest paid on that debt for that year and future years.

The election is a simple statement attached to the return, describing the proceeds received, the interest paid, and the purpose the proceeds were used for.