Can we deduct interest from our primary residence HELOC if it's used to help us refinance our investment prop?

Question

Because of foreclosures around our investment property, the appraisal put us upside-down by 20K. We'll have to make up the difference with a HELOC from our primary residence. Will we still be able to deduct the interest we'll be paying even though the HELOC is tied to our primary residence? If it is a big loss situation ($400 a month) what kind of deductions can we expect? Any tax credits?

Everyone has given me great information. THANK YOU. You were all helpful. The amt we'll be paying with our HELOC is $28K. We also plan to do improvements to our primary res, so somehow, having to now pay for them with cash, maybe we can avoid the interest from HELOC being added as income to the AMT since we'll have the receipts to prove we've made improvements - ? Let's hope. Again THANK YOU ALL.

Answer 1

A HELOC used for improvements to the property pledged as security are the same as for a regular mortgage. If the proceeds are used for any other purpose, as is the case here, only the interest on the first $100k is deductible. If the HELOC is less than $100k then you should not have any trouble deducting the interest. If it's more than that, you'll have to apportion the deduction.

There are no tax credits in this situation. A tax credit is a dollar for dollar reduction in tax, such as the EIC or Child Tax Credit. This is just a mortgage interest deduction so its value will depend upon your tax bracket.

Answer 2

On the 1040, you will be able to deduct the HELOC interest because it is tied to your primary residence.

On the AMT form, you will have to add this interest back to your income because the money wasn't actually used for your primary residence. If your AMT tax bill is higher than your 1040 tax bill, you will have pay additional tax.

Answer 3

Just to fine tune Boston's answer, the $100k limit is on all debt other than debt to buy, build or improve your home. That means that if you had paid down your original mortgage from $300k to $250k ( your new acquisition debt amount) and then refinance for $300k you would have used 50k of the $100k available as "home equity debt".

For clarity, the $100k liimit is not what you can deduct;it is the interest on that amount that is deductible.

Answer 4

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