Is HELOC Interest Tax Deductible on Rental Property?

A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by the equity in your personal residence. For real estate investors, the ability to deduct HELOC interest depends on a set of tax rules that focus on how the borrowed funds are spent, not the loan’s name.

Foundational Rules for Interest Deductibility

The Tax Cuts and Jobs Act of 2017 (TCJA) established that for tax years 2018 through 2025, interest on home equity debt is only deductible if the funds are used to “buy, build, or substantially improve” the home that secures the loan. This means if you use a HELOC on your primary home for its own remodel, the interest is generally deductible on Schedule A.

A separate principle in the tax code governs interest related to investment activities. The IRS views a rental property as an investment, and for these purposes, deductibility is determined by the use of the loan’s proceeds, not the asset securing it. When HELOC funds are directed toward a rental property, the investment interest rules take precedence, shifting the focus from your home to the rental property.

Applying the Rules to a Rental Property

You can deduct the interest paid on a HELOC when the funds are used for a rental property. This is possible because the interest is treated as an investment interest expense associated with the income-producing rental activity. This treatment relies on a concept the IRS calls “interest tracing,” which requires you to provide clear evidence that the HELOC funds were used specifically for the rental property and not commingled with personal expenses.

For example, if you draw $50,000 from your HELOC to purchase a new rental property, you must be able to show that the funds went from the HELOC account toward the property’s acquisition. The character of the expense is what matters. The interest becomes an ordinary and necessary business expense for your rental activity, allowing you to deduct it against the income generated by the property.

Required Record-Keeping and Documentation

To successfully claim a deduction for HELOC interest on a rental property, you must maintain detailed records that create a clear paper trail. The burden of proof rests on you to satisfy the IRS’s interest tracing requirements, and this documentation is your primary evidence in an audit. Using a dedicated bank account for rental activities is highly recommended to prevent the commingling of funds and make tracing easier.

Your records should include:

• HELOC statements from your lender showing the specific dates and amounts of each draw you take.
• Bank statements showing the deposit of the HELOC funds and the subsequent payments made for rental property expenses.
• Transactional proof related to the rental property expenditures, such as signed contracts, detailed invoices from contractors, and receipts for materials. For property acquisitions, this includes closing documents like the settlement statement.
• Form 1098, Mortgage Interest Statement, issued by your lender each year, showing the total interest you paid on the HELOC.

How to Claim the Deduction on Your Tax Return

After gathering your documentation, you must report the interest correctly on your federal income tax return. Interest from a HELOC used for a rental property is not reported on Schedule A (Form 1040), which is for personal itemized deductions. Claiming it in the wrong place could lead to the disallowance of the deduction.

The correct place to claim this expense is on Schedule E (Form 1040), Supplemental Income and Loss, the form used for rental real estate activities. On Schedule E, you will list the traceable amount of HELOC interest on the line designated for mortgage interest expenses.

This placement ensures the interest reduces your net rental income or increases your net rental loss, which directly impacts your adjusted gross income (AGI). You do not need to attach your tracing documentation to the return, but you must have it available if the IRS requests it.