Can I deduct home equity loan interest when I used it to buy a new property I now live in?

Yes, you can likely deduct that interest, but it depends on how you're reporting the properties on your tax return. Since you used the HELOC to purchase a residence, that makes the interest potentially deductible - the 2018 tax law changes limited HELOC interest deductions to funds used for buying, building, or substantially improving homes. For your current primary residence (the single-family home), you can deduct the interest on both the original mortgage on that property AND the HELOC from the duplex that you used to buy it, up to the combined total limit ($750,000 of total debt for newer loans). For the duplex that's now a rental property, you'd report rental income and expenses on Schedule E. The interest on any loans for that property (including possibly a portion of the HELOC) would be a rental expense rather than an itemized deduction. The key here is tracing where the HELOC funds went and how each property is classified (personal residence vs. rental). Keep good records showing that the HELOC was used to purchase your new primary residence.

I had almost the exact same situation last year and found https://taxr.ai incredibly helpful. I had a HELOC on my old house that I used to buy my new place, and I was totally confused about the deduction rules. I uploaded my mortgage docs and closing statements from both properties to taxr.ai and it analyzed everything and showed me exactly what was deductible. Saved me hours of research and probably a lot of money too since I was about to just not claim the deduction out of fear of doing it wrong! They have a feature that specifically traces how loan funds were used, which is exactly what the previous commenter mentioned is important for your situation. It was super helpful seeing the analysis broken down by property.

I was actually going to follow up saying I'd never try this, but I got desperate after my CPA gave me conflicting answers about my rental property HELOCs. I finally tried taxr.ai last week and I have to admit I was wrong to be skeptical! Uploaded my documents and it actually traced through three different loans showing which portions were for home improvement (deductible on Schedule A) versus which were for my rental properties (Schedule E). It even flagged that I'd been incorrectly deducting about $4,800 in interest on the wrong schedule in previous years and showed how to fix it. My situation sounds similar to the original poster's and it definitely cleared up the confusion. Definitely recommend for anyone with multiple properties or home equity loans.

If you need more clarification, I'd recommend calling the IRS directly. I know that sounds like a nightmare, but I used https://claimyr.com to get through. They have this service where they wait on hold with the IRS for you and then call you when an agent picks up. Check out their demo at https://youtu.be/_kiP6q8DX5c I was in a similar position with some rental property questions last month and was able to get a definitive answer straight from the IRS. The agent walked me through exactly how to report HELOC interest when the properties have different uses. Waited on hold for like 2 hours the first time I tried calling by myself and gave up - with Claimyr I just went about my day until they called me when an agent was ready.

I cannot believe I'm saying this but the Claimyr thing actually worked. After reading about it here I decided to try it yesterday because I've been trying to reach the IRS about this exact issue for weeks. Got a call back in about 90 minutes and spoke with an IRS agent who confirmed that yes, you CAN deduct the HELOC interest if the loan was used to acquire a primary residence, even if the loan is secured by another property. She directed me to Publication 936 and explained exactly how to document it on my return. Totally worth it just to have the peace of mind of an official answer instead of relying on internet advice (no offense to anyone here). Sometimes you just need to hear it straight from the IRS.

Make sure you keep REALLY good records showing exactly how the HELOC funds were used to purchase your new home. My tax guy says the IRS has been looking more closely at these kinds of deductions lately. You should have your closing documents from when you bought the new house showing the money trail from the HELOC to the purchase. Also worth noting there's a cap on how much total mortgage debt can qualify for the interest deduction ($750k for newer loans), so if your combined mortgages exceed that, not all the interest will be deductible.

Another thing to consider - since your duplex is now a rental property, you need to be careful about how you're allocating the interest. The portion of any loans (including the original mortgage) used for the duplex would be rental expenses on Schedule E, not itemized deductions on Schedule A. Only the HELOC interest that was used to buy your primary residence would go on Schedule A as an itemized deduction. It gets complicated but this distinction is important!

This is a great question and the answers here are really helpful! I'm dealing with something similar - I have a HELOC on my primary residence that I used to buy a rental property. It sounds like it's the opposite of your situation where you used a HELOC on what's now a rental to buy your primary residence. From what I'm reading here, it seems like the key is really documenting what the loan proceeds were used for. In my case, since I used the HELOC to buy an investment property, I believe that interest would be a rental expense on Schedule E rather than a personal itemized deduction. Has anyone else dealt with using a HELOC on their primary residence to purchase rental property? I want to make sure I'm handling the interest deduction correctly - it sounds like the "tracing rules" work both ways depending on how the funds were actually used.

Just wanted to add one more important consideration that I haven't seen mentioned yet - make sure you understand the timing rules for when you can start deducting the HELOC interest. Since you used the HELOC to purchase your new primary residence, you can generally start deducting that interest from the time you actually used the funds for the home purchase, not necessarily from when you first took out the HELOC. If there was any gap between when you opened the HELOC and when you actually used it to buy the house, the interest during that gap period might not be deductible. Also, if you only used part of the HELOC for the home purchase and the rest is still sitting unused or was used for other purposes, you can only deduct interest on the portion that was actually used to buy the qualifying residence. The IRS is pretty strict about this allocation, so good record-keeping is essential. It sounds like you have a solid case for the deduction based on your description, but definitely keep all that documentation handy in case you ever get audited!

This thread has been incredibly helpful! I'm a tax preparer and I see situations like yours all the time, especially with clients who have investment properties and primary residences. One thing I always tell my clients in your situation is to create a simple timeline document showing: (1) when you took out the HELOC, (2) when you used the funds for the home purchase, and (3) how much was used. This makes it much easier to explain to the IRS if you ever get questioned. Also, since your duplex is now fully rental, don't forget that you might be able to deduct other expenses related to that property on Schedule E - property management fees, repairs, depreciation, etc. The HELOC interest allocation is just one piece of optimizing your tax situation with multiple properties. Keep all those closing documents and bank statements showing the money trail from HELOC to home purchase. The IRS loves a clear paper trail, and it sounds like you're in good shape for claiming that deduction!

Great question! I went through almost the exact same situation last year. You're definitely on the right track - the key is that you used the HELOC proceeds to acquire your primary residence, which makes that interest potentially deductible under the current tax rules. Just to echo what others have said, the IRS traces how the loan funds were actually used rather than just looking at which property secures the loan. Since you used your duplex HELOC to buy what became your primary residence, that interest should qualify for the mortgage interest deduction on Schedule A. One thing I'd add is to make sure you understand how this affects your overall tax picture. The duplex mortgage interest (not the HELOC portion) will now be a rental expense on Schedule E since it's fully a rental property. But the HELOC interest goes on Schedule A as personal mortgage interest because of how those funds were used. I kept a simple folder with my closing statement from the house purchase, the HELOC agreement, and bank statements showing the fund transfers. Made tax prep much smoother and gave me confidence I could back up the deduction if needed. Sounds like you're in good shape with your documentation!