HELOC mortgage taken out on Pers. Residence to buy a "flipper" house

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  • nwtaxlady
    Senior Member
    • Sep 2009
    • 418

    #1

    HELOC mortgage taken out on Pers. Residence to buy a "flipper" house

    Client took out a Home Equity Line of Credit on his personal resident to purchase a house that he is fixing up to flip. The owner had died and he got a steel of a deal so he is flipping it.
    Does that mortgage interest go on as Investment Interest? Or 2nd home? I want to say Investment Interest. Correct me if I am wrong. TIA
  • spanel
    Senior Member
    • Oct 2008
    • 845

    #2
    Why would you not add it to the basis of the flip house?

    Comment

    • Lion
      Senior Member
      • Jun 2005
      • 4699

      #3
      Interest Tracing.

      Comment

      • nwtaxlady
        Senior Member
        • Sep 2009
        • 418

        #4
        Originally posted by Lion
        Interest Tracing.
        The actual house is not being used. He is making repairs and it's empty. So where would this interest be reported on the tax return?
        Interest tracing .... leads to he used the money (from his Personal Residence) to purchase a house he is going to flip.NOT going to rent it or live in it. Interest tracing ...would be investment interest?

        Or where?

        Comment

        • New York Enrolled Agent
          Senior Member
          • Nov 2006
          • 1532

          #5
          Originally posted by nwtaxlady

          The actual house is not being used. He is making repairs and it's empty. So where would this interest be reported on the tax return?
          Interest tracing .... leads to he used the money (from his Personal Residence) to purchase a house he is going to flip.NOT going to rent it or live in it. Interest tracing ...would be investment interest?

          Or where?
          I'm not sure if you understand where Lion is heading. Here's a decent article that might help.

          us-tax-deloitte-2020-interest-tracing-guide.pdf

          Comment

          • Rapid Robert
            Senior Member
            • Oct 2015
            • 1983

            #6
            Business interest expense limitation.
            "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard
            "That's enough! When you didn't know what you were talking about, you really had something! [to Curly]" -Moe Howard

            Comment

            • nwtaxlady
              Senior Member
              • Sep 2009
              • 418

              #7
              Originally posted by New York Enrolled Agent

              I'm not sure if you understand where Lion is heading. Here's a decent article that might help.

              us-tax-deloitte-2020-interest-tracing-guide.pdf
              Thanks for the article. So tracing the interest here it would be investment interest. So would it be investment interest on Sch A, or capitalize the interest and add to basis when he sells it?

              Comment

              • Lion
                Senior Member
                • Jun 2005
                • 4699

                #8
                Follow the money. He used the money to flip a house. If he'd taken out a biz loan to flip that house, where would you record the interest?

                Comment

                • nwtaxlady
                  Senior Member
                  • Sep 2009
                  • 418

                  #9
                  Originally posted by Lion
                  Follow the money. He used the money to flip a house. If he'd taken out a biz loan to flip that house, where would you record the interest?
                  That doesn't answer my question. Investment expense on SCH A or capitalize the interest and add to Basis for when he sells it.

                  Comment

                  • Lion
                    Senior Member
                    • Jun 2005
                    • 4699

                    #10
                    Where are you recording expenditures to flip that house? Is the house a passive buy/hold investment or an active trade/business to flip a house?

                    Comment

                    • Snaggletooth
                      Senior Member
                      • Jun 2005
                      • 3314

                      #11
                      If your client is in the business of flipping houses, all revenue and cost, including interest, should be on Schedule C. The downside of this, is he loses capital gain treatment when it is sold.

                      If this is just a one-time deal, he can either take investment interest (form 4952) or add to the basis of the home and not deduct it until sold. But not both.

                      Comment

                      • nwtaxlady
                        Senior Member
                        • Sep 2009
                        • 418

                        #12
                        Originally posted by Snaggletooth
                        If your client is in the business of flipping houses, all revenue and cost, including interest, should be on Schedule C. The downside of this, is he loses capital gain treatment when it is sold.

                        If this is just a one-time deal, he can either take investment interest (form 4952) or add to the basis of the home and not deduct it until sold. But not both.
                        Yes, I understand that one or the other. I think he will come out better if add to basis. And to answer the others, no he is not in the business of flipping houses. Just a one time thing.

                        Now, another question for you. A DIFFERENT CLIENT:
                        Taxpayer personal residence is paid off. He took out a Home Equity Loan to purchase the house next door. Not renting it. Just using it for family members to live, they have a large family. Not planning on selling it. Just a second home next door for family. So do I understand this correctly, that it is NOT deductible because it is not secured on that home? TTB pg 4-10 Under deductible home mortgage interest says that
                        "Home equity loan interest is not deductible unless used to buy, build or improve the home that secures the loan." So that tells me that it is NOT deductible. Do you agree?

                        Comment

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