How to Deduct Interest on a Home Equity Line of Credit (HELOC)

If you have significant equity built up in your home and want to use a HELOC to purchase a rental property, despite the prohibition on deducting home equity interest under Section 163(h)(3)(F)(i), such interest is deductible on your Schedule E if you make the proper election. The election, known as the 10-T election (Treas. Reg. 1.163-10T(o)(5)), allows you to treat the HELOC as a debt that is not secured by your principal residence and the general interest tracing rules will then apply (i.e., it will be traced to your purchase of the rental property to the extent it funded the purchase). The election requires you to include a written declaration with your filed tax return.

In light of the elimination of the interest expense deduction on home equity indebtedness by the TCJA, this can provide significant tax savings. Note that the TCJA’s prohibition on deducting interest on home equity indebtedness sunsets after 2025; however, it could be extended or made permanent by future legislation.