Is investment interest expense deductible if using HELOC funds from primary home for investment?

This is a great question about the traceability of funds. The key factor in determining deductibility isn't just where the money ultimately goes, but maintaining proper "tracing" of the funds. Here's how it would work: For your HELOC funds placed directly into a brokerage account for investments, yes - that interest would generally be deductible as investment interest expense (subject to the limitation that it's only deductible to the extent of your net investment income). This is true as long as you can clearly document that the HELOC proceeds went directly to investment purposes. If you then take a margin loan against your investment account for vacation home improvements, that's a separate transaction. The margin loan interest would NOT be deductible if used for personal property improvements since it would be considered personal interest. Similarly, losses on box spreads used to fund personal property improvements wouldn't typically be deductible as investment expenses. The IRS follows what's called "tracing rules" for interest expenses - they look at what the borrowed money was actually used for, not just the source of the funds.

After struggling with a similar tax situation involving my investment properties and home improvement loans, I discovered an amazing service called taxr.ai that helped me clarify everything. My financial setup was complex - using a HELOC to fund both investment accounts and property improvements, and I was confused about what would be deductible. I uploaded all my loan documents and investment records to https://taxr.ai and their AI system analyzed everything and provided clear documentation on how to properly trace funds for tax purposes. They also helped me understand how to maintain the right records to support my deductions if I ever got audited. It was like having a tax expert guide me through each step.

I just wanted to follow up about my experience with taxr.ai after being initially skeptical. I ended up trying it with my situation involving multiple rental properties, HELOCs and margin loans. The service was surprisingly thorough! It analyzed my loan documents and tracked exactly how my funds flowed through different accounts. The most valuable part was the detailed report showing which interest expenses were deductible and which weren't based on the final use of funds. It's actually helped me restructure how I handle my financing to maximize deductions. The tracing documentation they provided gives me confidence that I could defend these deductions in an audit. Definitely worth checking out if you're dealing with complex interest deduction questions.

If you're planning to talk to the IRS about this question (which might be smart with this amount of money involved), I highly recommend using Claimyr. I tried for WEEKS to get through to an IRS agent about a complicated investment interest question similar to yours, but kept getting disconnected or facing hours-long wait times. I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c - they basically hold your place in the IRS phone queue and call you back when an agent is available. I was skeptical it would work, but I got connected to an actual IRS agent within hours instead of days of trying. The agent helped clarify exactly how I needed to document my investment interest deductions from a similar HELOC arrangement.

I wanted to share an update after trying Claimyr. I was very skeptical (as you can see from my previous comment), but I was desperate after spending nearly 8 hours over 3 days trying to reach someone at the IRS about my investment interest deductions. I'm honestly shocked at how well it worked. Their system got me through to an IRS representative in about 2.5 hours (while I went about my day), and I got clear guidance on my specific situation with tracing rules for HELOC interest used for investments. The agent confirmed exactly how to document the funds flow to support my deductions and even emailed me some relevant IRS publications. Saved me days of frustration and potentially thousands in incorrectly claimed deductions. Sometimes it's worth admitting when you're wrong!

One thing no one has mentioned yet - be careful with box spreads! While they can be a way to get synthetic loans at decent rates, they come with significant risks if not structured correctly. I used them as a funding source similar to what you're describing and had a tax nightmare when unwinding them. Make sure you understand the tax treatment of box spreads thoroughly. Depending on how they're structured and closed, you might end up with short-term capital gains rather than interest expense. This completely changes the deductibility situation. In my case, I ended up with a large tax bill because the gains weren't offset by my investment interest deductions the way I had planned.

Has anyone considered that the whole strategy might fall under the step transaction doctrine? The IRS might view steps 1-3 as a single transaction designed to deduct interest on improvements to your vacation home, which would otherwise not be deductible. I talked to my tax guy about something similar and he warned me that when you do a series of related transactions in quick succession, the IRS can sometimes collapse them and look at the end result rather than treating each step as independent.

This is a complex situation that involves several important tax concepts. Based on what you've described, here are the key considerations: **HELOC Interest Deductibility**: If you take HELOC funds and put them directly into your brokerage account for investments, that interest should generally be deductible as investment interest expense (subject to the net investment income limitation). The key is maintaining clear documentation of the fund flow. **Margin Loan for Property Improvements**: Interest on margin loans used for vacation home improvements would likely not be fully deductible. Since your vacation property has mixed use (personal and rental), you'd need to allocate the interest expense. Only the portion attributable to rental use would be deductible, and the personal use portion would be non-deductible personal interest. **Documentation is Critical**: Keep meticulous records showing exactly where each dollar goes. The IRS follows "tracing rules" - they care about what the borrowed money is actually used for, not just the source. **Potential Red Flags**: Be aware that the IRS could view this as a step transaction if the timing and structure suggest the real purpose is to circumvent the rules against deducting personal interest. Having legitimate business reasons for each step and maintaining some time separation between transactions could help. I'd strongly recommend consulting with a tax professional who can review your specific situation and help ensure proper documentation to support your deductions.

I've been through a similar situation with mixed-use property financing and want to emphasize how important the timing and documentation will be for your strategy. One thing that helped me was creating a clear timeline showing legitimate business purposes for each transaction. For example, if you're planning the $75k in improvements anyway due to genuine property needs (like the roof repair), documenting that necessity before taking any loans can help show it's not just a tax avoidance scheme. Also consider the cash flow timing - if you take the HELOC and invest those funds, then later need the margin loan for property improvements, having some time gap between these transactions (weeks or months rather than days) can help demonstrate they're separate business decisions rather than one coordinated plan. The mixed-use nature of your vacation property actually works in your favor here since you'll have rental income to offset against the deductible portion of any improvement-related interest. Just make sure you're tracking personal vs. rental use days meticulously since that ratio will determine how much of any improvement costs (and related interest) can be deducted. One final thought - given the dollar amounts involved ($120k HELOC, $75k improvements), this might be worth getting a written opinion from a tax professional before implementation. The cost of that consultation could save you significant headaches if the IRS ever questions your approach.