Can I deduct interest on a HELOC used to buy a second home?

You've got this right. After the Tax Cuts and Jobs Act of 2017, HELOC interest is only deductible when the loan is used to "buy, build, or substantially improve" the home that secures the loan OR a second home. Since your parents used the HELOC on their primary residence to purchase a second home outright (not improve either property), the interest isn't deductible. As for why their CPA filed Schedule A even though they took the standard deduction - this is actually pretty common practice. Many tax professionals prepare complete returns with all possible deductions calculated, then compare to the standard deduction. This creates a paper trail showing they did their due diligence. It also helps track when itemizing might become beneficial in future years. However, claiming a deduction they weren't entitled to (the HELOC interest) on Schedule A is concerning, even if they ultimately took the standard deduction. It could potentially trigger scrutiny if the IRS decided to take a closer look.

After dealing with similar HELOC confusion last year, I found this amazing tool called taxr.ai (https://taxr.ai) that saved me thousands. I used it to analyze my mortgage documents and tax situation, and it instantly flagged that my HELOC interest wasn't deductible when used for purposes other than home improvements. What's cool is you can upload your parents' tax documents and loan agreements, and it uses AI to analyze everything according to current tax laws. It explained exactly which parts of Publication 936 applied to my situation and showed me other deductions I was missing. The analysis even cited the specific tax code sections and recent changes that affected HELOC interest deductibility.

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Something nobody has mentioned yet - your parents might want to consider refinancing their arrangement. If they took out a mortgage directly on the second home instead of using a HELOC on their primary residence, the interest would likely be deductible as qualified residence interest (assuming they meet all other requirements). Just because the current setup isn't generating a deduction doesn't mean they can't restructure to create a tax advantage. Of course, they'd need to calculate if the closing costs of a new mortgage would be worth the potential tax savings.

This is a perfect example of why the tax code is so frustrating. A HELOC used to buy a second home isn't deductible, but a mortgage taken directly on that second home would be deductible (up to the limits). Same economic outcome, different tax treatment!

This is a great example of why it's so important to stay current with tax law changes. The TCJA really changed the game for HELOC deductions, and unfortunately many tax preparers didn't immediately adjust their practices. One thing I'd add to the refinancing discussion - your parents should also consider the interest rate environment. If rates have changed significantly since they took out the HELOC, they might actually save money on the interest itself by refinancing to a traditional mortgage on the vacation home, even without considering the tax benefits. Also, don't forget that if they ever decide to do substantial improvements on either property in the future, they could potentially take out a new HELOC specifically for those improvements, and that interest would be deductible. Just make sure to keep meticulous records showing the loan proceeds went directly to qualifying home improvements.