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

[nwtaxlady]

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]

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

[Lion]

Interest Tracing.

[nwtaxlady]

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?

[New York Enrolled Agent]

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

[Rapid Robert]

Business interest expense limitation.

[nwtaxlady]

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?

[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?

[nwtaxlady]

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.

[Lion]

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?

[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.

[nwtaxlady]

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?