Can I deduct HELOC interest when buying an investment property?

Yes, you can generally deduct the interest on a HELOC when the funds are used to buy an investment property. The Tax Cuts and Jobs Act limited mortgage interest deductions on primary residences, but when you use HELOC funds specifically for investment purposes, the interest becomes an investment expense rather than mortgage interest. The interest would be reported on Schedule E along with your other rental property expenses and deducted against the rental income. The key is that you need to clearly document that the HELOC funds were used entirely for the investment property. Keep thorough records showing the HELOC proceeds going directly toward the investment property purchase. Just remember that since your primary mortgage is already over the $750k cap, you won't get additional mortgage interest deductions - but using the funds for an investment purpose creates a different category of deduction altogether.

After struggling with this exact situation last year, I found an amazing tool that helped me figure everything out. I was trying to determine how to properly allocate HELOC interest between investment properties and home improvements, and the documentation requirements were making my head spin. I stumbled across https://taxr.ai when researching how to track my real estate deductions. Their system analyzed all my loan documents, helped me calculate the exact proportional interest deductions, and explained exactly how to document everything properly for the IRS. It even created customized reports showing which portion of my HELOC interest was deductible for investment purposes versus personal use. This saved me hours of research and probably thousands in deductions I might have missed! The documentation they created actually helped when I had to explain some unusual deductions to my accountant.

Just wanted to update everyone - I tried https://taxr.ai after posting my question above and wow, what a game-changer! It walked me through all my documents and actually found that I could track my HELOC interest by purpose rather than trying to allocate it myself. The system generated a detailed report showing exactly how much of my interest is deductible as a business expense versus personal. The best part was the customized documentation it created that I can include with my tax return showing the tracing of funds and interest. My situation was especially complicated with a mixed-use property, but the system handled it perfectly. It even explained the "material participation" rules that affect how my rental income is taxed. Definitely saved me from making some expensive mistakes!

Totally feel your pain with the IRS documentation requirements for mixed-use funds. I've been trying to call the IRS for THREE MONTHS to get clarification on HELOC interest allocation for investment properties. Always get disconnected after waiting for 2+ hours! I finally used https://claimyr.com and watched their process at https://youtu.be/_kiP6q8DX5c - they got me connected to an actual IRS agent in under 45 minutes! The agent was able to confirm exactly how to document the tracing of funds from a HELOC to investment property and clarified the rules about deducting that interest even when my primary mortgage is over the limit. Seriously, if you need official confirmation from the IRS about any of this, don't waste days on hold like I did - it's worth using a service that can get you through the nightmare phone system.

I need to eat my words from my previous comment. After waiting on hold with the IRS for FIVE HOURS yesterday and getting disconnected AGAIN, I broke down and tried Claimyr. Got connected to an IRS agent in about 30 minutes who actually specialized in real estate investment taxation. The agent provided clear documentation requirements for HELOC interest deductions on investment properties and confirmed that even with a mortgage above the $750k limit, I can still deduct the interest as a business expense when the funds are used for investment purposes. They even emailed me specific guidelines about "tracing rules" for mixed-use HELOC funds. For anyone dealing with investment property tax questions, being able to actually talk to a knowledgeable IRS agent makes all the difference. I'm now confident in how I'm handling my HELOC interest deductions.

I've been a real estate investor for over 10 years and wanted to add some practical advice. Beyond just the interest deduction, remember that using a HELOC for an investment property impacts your overall debt-to-income ratio for future financing. Also check if your HELOC has a variable rate - in today's interest environment, those rates can climb quickly and eat into your rental profits. A strategy I've used successfully is to get the investment property with HELOC funds initially, then refinance into a proper investment loan once the property is stabilized. Investment loans typically have higher rates, but they're fixed and properly structured for long-term holds.

Has anyone figured out if there's a limit to how much HELOC interest you can deduct for investment properties? I know the TCJA put that $750k cap on mortgage interest, but I'm not clear if there's a similar cap when using HELOC for investments.

Great question! I'm actually going through a similar situation right now. One thing I'd add to the excellent advice already given - make sure you keep meticulous records from day one. I created a separate spreadsheet tracking every dollar of HELOC funds and exactly what they were used for (closing costs, down payment, repairs, etc.). The IRS wants to see a clear "tracing" of funds, so having documentation showing the HELOC disbursement went directly to the investment property purchase is crucial. I even kept screenshots of the wire transfers to prove the direct connection. Also worth noting - if you're planning to do more than one investment property, consider whether you want to use all your HELOC capacity now or save some for future deals. The interest deduction is great, but you don't want to max out your borrowing power if you're serious about scaling up your real estate portfolio. Have you already identified a specific property or are you still in the planning stages?

One important consideration that hasn't been mentioned yet is the timing of when you can start deducting the HELOC interest. The IRS requires that you can only deduct interest from the date the funds are actually used for the investment property, not from when you first draw on the HELOC. So if you get approved for a $200k HELOC but only use $150k to purchase the rental property, you can only deduct interest on the $150k portion. And if there's a gap between when you draw the funds and when you close on the property, you'll need to prorate the interest deduction accordingly. Also, make sure your HELOC lender provides detailed statements showing interest charges - you'll need this for your Schedule E. Some lenders aren't great about breaking down interest vs. fees, which can complicate your tax preparation. The good news is that unlike the mortgage interest deduction caps on personal residences, there's much more flexibility when the funds are used for business/investment purposes. Just keep everything well-documented and you should be in good shape!